The Once and Future Unit of Finance – Precious Metals Supply and Demand
Sally Forth and Speculate on my Behalf!
Last week, the price of gold was down ten bucks and silver four cents. Someone on Twitter demanded if we didn’t find it odd that the biggest sovereign debt bubble has managed to inflate a bubble in virtually every asset price except for gold.
Snapshot from a recent Goldbugs Anonymous meeting. Why, oh why have you failed to bubble my asset, dear fellow speculators? [PT]
Given that he went on to assert there is a bubble in paper gold claims, he is trying to say that gold has to besuppressed. Otherwise its price would be much higher. We won’t reiterate here the proof that this conspiracy theory is false.
Instead, we want to address two points. One, the term bubble is used quite flexibly. Does it mean the price of something is too high? For example, the S&P Index at nearly 3000. Or does it mean there is too much quantity of something, e.g. debt.
Or that something is being done to unhealthy degree, e.g. sending non-students off to university to get degrees that will not increase their employability? One should use each word with care and precision. Otherwise ambiguity permits one to migrate freely between different concepts.
Clearly, this guy is jealous that the prices of other assets have gone up, making other speculators rich. But the price of gold has not, thus not making him rich. Instead of admitting he was wrong to believe the gold-to-$10,000 story, he blames the world. Also, he is wrong about something else. The price of oil has not exactly gone up; or real estate in many non-trendy locations.
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Battling the barbarians at the gate… [PT]
File under “reasons to buy gold”: A famous photograph by Henri Cartier-Bresson of a rather unruly queue in front of a bank in Shanghai in 1949 in the final days of Kuomintang rule. When it dawned on people that the communists couldn’t be stopped, they frantically tried exchange their government-issued paper money for gold. In preparation for its exodus to Taiwan, the Kuomintang regime had forced everyone to exchange their gold, silver and foreign exchange for a new paper currency, the Jingyuanquan in 1948 (“golden yuan”) – which it promptly inflated with gay abandon, belying its name. It then tried to combat rising prices with price controls – a strategy that has reliably failed since at least the times of the Roman Empire. It reversed the policy a few months later, as even its main supporters became thoroughly fed up. The people in the picture above were among those who had clearly waited too long to take advantage of this policy reversal. [PT]
Left: the first IKEA store located in Älmhult in Sweden, near the residence of the company’s founder (nowadays the store is a museum); right: a Task Rabbit car. Given the valuations at which TaskRabbit was able to raise funds recently, it is a good bet IKEA paid a small fortune to take it over (waiting for the QE-induced bubble to burst may have been cheaper). [PT]
J.M. Keynes at a relatively young age. In his 1919 book The Economic Consequences of the Peace, Keynes sounded quite sane for the most part, both in terms of his political and economic analysis (although his interventionist leanings were already shining through. For reasons unknown he went completely off the rails in the 1930s). He wrote the book after attending the Paris Peace conference, where he argued for much more generous peace terms than the victorious allied nations were prepared to grant. While no-one will ever be able to prove it, there is a reasonable chance that a less vindictive peace treaty may have helped avert the German hyperinflation catastrophe and further down the road, perhaps the rise of Hitler as well. After all, Hitler’s influence grew on the fertile soil of Germany’s impoverished, antagonized and increasingly radicalized former middle class – and the event that arguably contributed to this state of affairs like no other was the collapse of the currency after the war. [PT] Photo credit: Bettmann / Corbis
The gold-silver ratio from 1800 to 1915. In the 1870s, numerous nations around the world dropped bimetallism in favor of a gold standard (France was a noteworthy exception). Thereafter it quickly became obvious that silver had been vastly overvalued at the official exchange ratio. It was essentially a subsidy for silver miners. Once a pure gold standard was adopted, mild consumer price deflation became the norm, as economic productivity grew faster than the supply of gold. Contrary to what virtually all central bankers nowadays assert, this had no negative effects on the economy whatsoever. On the contrary, the four decades following the adoption of the gold standard produced the biggest and most equitable real per capita growth the US has ever seen – such growth rates were never again recaptured. Of course, at the time government spending represented between 3% to 4% of total economic output, i.e., government was but a footnote in most people’s lives. The reason why governments subsequently sabotaged the gold standard was precisely that they wanted to grow without limit. [PT]
Eight Spanish silver reales, or “pieces of eight” which consisted of 387 grains of pure silver (the coin on the upper right is a Mexican piece of eight, with Chinese chop marks). These coins were minted by the Spanish Empire since 1598 and were of the same size and weight as the German Thaler, which in turn was standardized across all German territories since the 15th century. These coins were legal tender in the US until 1857 and for a long time were the by far most widely used coin. The Coinage Act of 1792 established that the new US dollar was to be equal in value to Spain’s pieces of eight, but people soon found out that the US Mint used a slightly different standard of fineness (0.9 instead of 0.8924), which meant that about 1% more silver was needed to mint a dollar. This made them reluctant to bring silver to the mint, hence the Spanish coins continued to dominate in daily life. Spanish reales were actually the first world currency, and it worked splendidly for almost 300 years (incidentally, over the time of its existence, this was the least debased coin in the Western world, which explains its popularity). People would cut the coin into 8 pieces (“bits”) of equal size for smaller transactions and to make change – prices on US stock exchanges were quoted in fractions based on these 8 bits for a very long time. The United States Assay Commission which kept an eye on the quality of the production of the US Mint was one of the few bureaucracies to ever be disbanded – in 1980. This is actually testament to the stickiness of bureaucracies – gold coins had been out of circulation since 1933 and silver coins since 1965 (a rudely debased half dollar existed until 1970). [PT]
