Two Out of Three's Not Bad
by Alfred Adask
Bill Bonner is a widely-respected author of books and articles on economic and financial subjects. He's the founder and president of Agora, Inc., and author of a daily financial column,
Bill Bonner's Diary.
Mr. Bonner recently published an article in
The Daily Reckoning entitled "We might be in the early stages of a gold 'super spike'". In that article, he made one observations that was brilliant, a second that triggered some insight, and a third that was silly.
"At times, gold behaves like a
commodity. The gold pricetracks the ups and downs of commodity indices.
"At other times, gold is viewed as a safe haven
investment. It competes with stocks and bondsfor investor attention.
"And on occasion, gold assumes its role as the most stable long-term form of
money the world has ever known.
"Gold is a chameleon.
It changes in response to the environment."
What a brilliant observation.
Gold has multiple natures-three of them: commodity, investment and money.
More, Mr. Bonner implied that gold "magically" becomes whatever you and/or your economy really need at any given moment. When your economy needs gold to be a
commodity, it's a commodity. When you need gold to be an
investment, it's that, too. When you need gold as
presto-changeo!, gold becomes money.
Mr. Bonner's description of gold's multiple "natures" implies that, no matter what kind of economy you're in, gold will be useful and valuable in at least one of its three "natures".
Another implication is that, since most other financial options usually have only one primary use (as a commodity, investment, or as currency), they shouldn't be as highly-valued as gold since gold alone can "magically" become whatever you most need at any particular moment. Most other investments (stocks, bonds, and currencies) can go to zero. Gold can't.
Implication: Because gold has
multiple natures, it's an "investment" for all seasons.
"For one thing,
gold price action has
diverged from the price action of
other commodities. This divergence first appeared in late 2014 but has become more pronounced in recent months."
Q: What's that
A: It signifies that buyers are increasingly valuing gold as
money rather than as a
We've been told for years that gold is now only a "commodity". Most Americans accepted that claim. But, more recently, Americans are beginning to value gold as money rather than as a commodity.
Result? The prices of commodities in general and that of gold are diverging. While the prices of most commodities are falling, the price of gold (no longer clearly deemed a commodity and increasing viewed as a "monetary" metal) is rising. The rising price of "monetary" gold makes perfect sense as the debt-based dollar declines/inflates ever closer to its demise.
Gold is the fiat dollar's pallbearer. As the price of gold rises, the debt-based dollar doesn't merely lose value, it staggers closer to its grave.
* Bonner continued:
". . . citizens around the world are starting to
lose confidence in other forms of money, such as dollars, yuan, yen, euros, and sterling. The price of gold in many currencies is going up as
confidence in those other currencies goes down. Confidence in [fiat] currencies is dropping because investors are
losing confidence in the
central banks that print them."
Not exactly. It's true that citizens and investors around the world are
losing confidence in fiat currencies. But saying that "investors are losing confidence in the
central banks" is too imprecise to describe the essence of that lost confidence.
Q: Given that we've been told repeatedly that fiat, debt-based monetary systems are based on
public confidence, what's the
basis for that "confidence"? What, exactly, are we "confident" about?
A: Given that we have a
debt-based monetary system, that confidence is ultimately based on the capacity of government and/or the central banks and/or even fiat currency to
pay their debts. We accept and value the government's debt-based monetary instruments (U.S. bonds and fiat dollars) as currency because we are
confident that the government can and will one day
pay its debts.
However, if the National Debt grows so large that even fools can see that it can't possibly be paid, then most people will
lose confidence in
value of government's bonds and debt-based currency. The ultimate "value" of every "debt-based monetary instrument is that instrument's ability to somehow, actually "pay" the associated debt. The "value" of a $100 bill is our confidence that anyone holding that bill can exchange it for $100 worth of tangible assets. The "value" of a $100,000 U.S. Bond is based on the public confidence that that bond (a promise to pay) can be exchanged for $100,000 worth of tangible assets. Without public confidence that the underlying debts can somehow be paid in full, the value of the correlative debt instruments (bonds, fiat dollars) falls towards, or even to, zero.
"Gold's role as money is difficult for investors to grasp. One criticism of gold is that is has
no yield. Gold has no yield because money has no yield. In order to get
yield, you have to take
Another important observation from Mr. Bonner that leads me to a new (for me) insight:.
You purchase $1 million worth of gold and it just sits there. It's not like a bond because bonds pay interest. Gold doesn't pay any interest. Gold does not have a "yield".
Q: But why doesn't gold have a yield?
A: Gold has
no yield because it has virtually
If you buy a top-value bond, it might pay 2% interest. If you buy a "junk" bond, it might pay 20% interest. It's common knowledge that the riskier the bond, the higher the interest-rate/yield. The correlative should also be true: the safer the investment, the lower the risk and therefore the lower the interest rate paid by safe investments.
Given that gold pays even less interest than the best bonds, it follows that gold should be even less risky than the best bonds.
From that perspective, gold's lack of yield should not be deemed a detriment to purchasing gold. Instead, gold's lack of "yield" should be evidence that gold is both "money" and possibly
the safest investment in the world. Therefore, if you're looking for a
safe investment, the fact that gold does not produce a "yield" is not reason to avoid investing in gold-it's reason to purchase all you can afford.
"Lost confidence in fiat money starts slowly then builds rapidly to a crescendo. The end result is panic buying of gold and a price 'super spike'. . .that could take gold to
$10,000 per ounce or higher. When that happens, . . . gold will be in such
short supply that only the central banks, giant hedge funds, and billionaires will be able to get their hands on any. The mint and your local dealer will be sold out. That physical scarcity will make the price super spike even more extreme than in 1980."
Ooo. "$10,000 per ounce"?
I like the sound of that.
But I disagree with Mr. Bonner's warning that the price of gold might rise so high that you won't be able find any to purchase.
Like a lot of analysts, Bonner warns that one day the supply of gold for sale will dry up and disappear.
While such a scenario is conceivable for a few days after some sort of economic crash, the shortage would only be temporary. Gold is
always for sale. There'll never be a time when you can't purchase gold. It just depends on the
price you're willing to pay.
For example, I could run around like Chicken Little screaming that "OMG-there's no more gold for sale! There's no more gold for sale!" And I'd be right, too,
if I qualified my warning by saying "There's no more gold for sale-
at $500 per ounce."
Of course there's no gold for sale-
at that price. In today's market, where gold is currently over $1,275, nobody's dumb enough to sell his gold for $500/ounce. Thus, it's absolutely true that "there is no more gold sale!" (at $500/ounce).
Q: But if there's truly no gold for sale at $500/ounce, how much gold do you suppose is currently for sale for
A: Lots. Maybe all of it. Today, at that price, if I had enough fiat currency to purchase it, I could fill an Olympic-sized swimming pool full of gold.
Yes, there may be brief interludes when you can't easily purchase gold since the price is rising rapidly. For example, suppose gold was $4,000 in January and had since risen by $1,000 a month and was now $8,000. It wouldn't be easy to find gold for sale at $8,000 since almost everyone would be betting that gold would go to $9,000 next month, and $10,000 the month after. But if you offered to pay $10,000 now (when the market price was deemed to be $8,000), there'd be lots of sellers who'd doubt that gold was going to go to $10,000 and would therefore sell in order to lock in their profits.
Gold is always for sale. It just depends on the price. The idea that the gold markets will seize up and disappear is silly.
* Mr. Bonner had three arguments or insights.
One was brilliant: gold has three different "natures" (commodity, investment and money).
A second, (their was no yield (interest) paid on gold) helped me to deduce that no yield is evidence of gold's superior safety and value.
The third (the price of gold could rise so high that there won't be any available for purchase) was a dog.
Two good ones out of three.
Janet Yellen: "Not a Bubble Economy"
by Alfred Adask
Last April, the Wall Street Journal hosted a video interview of Ben Bernanke and Paul Volcker, former chairmen of the Federal Reserve and Janet Yellen, current chairperson of the Fed. There's a 2-minutes-and-34-second segment from that video at
that focuses on Mrs. Yellen .
In that segment, Ms. Yellen seems nervous. Perhaps she's not used to public speaking. Maybe she's intimidated by Bernanke's and Volcker's presence. Maybe she's lying and, unlike Obama, has little confidence in her ability to lie convincingly.
That segment is generally dull and unconvincing as Ms. Yellen tries to "sell" the idea that the economy is strengthening. But there is some meat in that segment as Ms. Yellen insists twice that the U.S. economy is not a "bubble economy".
The U.S. economy is not a "bubble economy"?
M'thinks Ms. Yellen doth protest too much.
Suppose I maxed-out all of my credit cards, borrowed heavily from the local bank, and hit all of my friends and fans for every dime I could beg, borrow or steal.
Suppose I used all the money I borrowed to buy a new $1 million mansion, a Tesla Model S auto and an extensive new wardrobe. Anyone looking at my clothes, car and home would suppose that I must have a great job, a strong income stream and be very prosperous.
But what if they learned how little money I actually make and how deeply indebted I was? Do you suppose that they'd realize that my seemingly-prosperous lifestyle was mostly an illusion based on my capacity to go into debt rather than my capacity for productivity?
If my lifestyle was mostly a debt-based illusion, would it be fair to call me a fraud and my lifestyle a "bubble" that was inflated by debt that was not only excessive but even irrational since I could never hope to repay it?
Now, apply the same principles of apparent prosperity based on debt to our allegedly "strong" U.S. economy:
The "official" National Debt has more than doubled since Obama took office and is now nearly $20 trillion.
John Williams (shadowstats.com) claims the true national debt is closer to $100 trillion. The Congressional Budget Office and economist Laurence Kotlikoff have said that, including unfunded liabilities, the U.S. government's true national debt is over $200 trillion.
My question for Ms. Yellen is this: How can any rational person claim that-despite being built on at least $20 trillion in National Debt that won't ever be repaid in full-the U.S. economy is strong, self-supporting, and definitely not a "bubble economy"?
it's a "bubble economy".
All modern economic "bubbles" are ultimately built on excess and irrational debt. The "bubbles" are inflated with debt and/or debt-instruments (mere promises to pay).
Hasn't our seemingly strong (but overly-indebted) U.S. economy been "inflated" (stimulated) with excess debt? Isn't that what the Quantitative Easing (QE) of the past several years has been all about--to "stimulate"/"inflate" the U.S. economy with trillions of dollars worth of unpayable debt-instruments (promises to pay)?
If so, how can Ms. Yellen or anyone else reasonably claim that the U.S. is not a "bubble economy"--and keep a straight face?
The truth is that the U.S. economy is a "bubble economy". Our enormous debt proves that it's a "bubble". As such, it's certain to "pop"-and probably not so long from now.
In fact, since the global monetary system is based on debt, the whole global economy is also a "bubble economy". As such, the global economy is also certain to "pop". And, if it's not already doing so, probably not so long from now.