A BRIEF HISTORY OF GOLD AND STABILITY/INSTABILITY

 

Comprehensive written records of human activity go back to about 3000 BCE in Egypt, Sumer, and Mesopotamia.  Undoubtedly there was writing somewhat before then but it has been lost to us on account of some kind of massive flooding event that destroyed records before this time.

The earliest records are largely of two sorts, a) cosmology and prayer/curse literature and B) transactions.  From the transactional literature (this much grain was harvested and turned into this much wheat and traded for this many cows etc) we know that Gold and silver and certain base metals were used even in these early times as forms of money.  

Gold was used especially for large trade inolving governments.  Sophisticated units of weights were used to measure the gold which could then be traded for other valuable commodities.

It wasn't until about 700 BCE that gold (often mixed with silver to form electrum) was cut into small units of account that could be used by individual traders for smaller transactions.  This practice proved to be so convenient that retail trading posts (shops) opened up all across western Asia where this practice originated.  (Present day Turkey).  

In about 550 BC Croesus of Lydia originated the first Bi-metallic coinage system.  Within a hundred years, this system had spread thoughout the western world.  

400 years later as Rome conquered the known world the system of metallic coinage, with Gold being the most valuable and sought after metal,  became the standard of trade throughout the known world.

By this time there had arisen a class of private citizen that had become extremely wealth and powerful by being adept traders - rather than skilled warriors.  This trade economy also necessitaed the birth of a class of lawyers and judges to draw up contracts and settle disputes - and citizen class to serve a juries.  The economies of this period were quite similar to our own.  Gold was thought of as the glue that held these economies together - because privately owned gold conferred a security to private wealth that could only be challenged by Emperors who controlled vast armies.  

This lasted through the Byzantine Empire, through the medieval period, through the Italian Renaissance and through empires domintaed by the British, French, Dutch,  and Spanish.  Through two world wars and up until 1971 when Richard Nixon closed the gold window and the world converted to Dollars.

Still, after 1971 all major governments of the world kept Gold as a reserve currency of last resort in order to stabilize their wealth should their fiat currencies encounter periods of loss of faith.

This was largely unnecessary as the US economy was so dominant in the world there was no serious challenge to the hegemony of the dollar.  And whatever difficulties the US ecnomy did encounter - it was the worlds' principal creditor nation which gave it the flexibity to deal with temporary setbacks.

The biggest setback occured in the late 1970's with a vicious stagflation.  THe Fed Head Volker riased rates to 18 percent and crushed inflation.  Gold soared from $250 to $750 and then fell back to $250 when inflation was crushed.  The dollar was still King.

This is where is all started to go wrong.  

With rates at 17 percent Reagan and the new Fed Head Greenspan then got the idea that the RELATIONSHIP BETWEEN THE PRICE OF MONEY AND REAL WORLD BEHAVIOR IS LINEAR.  In other words if cutting taxes from 90 percent to 60 percent stimulated positive risk taking behavior, then it should follow that cutting taxes fromf 60 percent down to ZERO should be equally simulative.  The same for interest rates.  If cutting from 18 percent to 16 percent was stimulative, then cutting from16 percent all down to Zero AND BELOW should be equally stimulative.

This is not reflective of how humans behave.  Somewhere on the way down towards zero humans stop taking risks that enhance the economy and start to take risks that are detrimental to the economy.  As money becomes cheaper than the real cost of money humans begin to recklessly gamble.  And as very very rich humans recklessly gamble the Fed has to bail out mistakes that are so big they affect the entire economic community.  

This gambling economy becomres increasingly unstable.  Because  each bailout requires more and more debt.  And each lowering of the cost of money below a stable equilibrium also fosters increasing debt.  To the point where we find ourselves today with the cost of money anchored near ZERO and debt and the Gambling impulse supported towards infinity - with infinite bailouts for the richest strata of scoiety.

Thus we move towards maximum INSTABILITY

And as Instability reaches intolerable levels gold begins to rise towards maximum value.

GOLD VS BITCOIN

 

What is the relationship between Bitcoin and Gold?

They are diametric opposites.  Despite the heavy propoganda campaign being waged by Bitcoin publicists that make the case that both Bitcoin and Gold are inflation hedges - nothing could be farther from the truth.

In fact, Bitcoin is a risk asset.  It behaves as a risk asset in that it goes up when the stock market goes up, and goes down when the stock market goes down.  It is sort of like playing an option on the stock market.  A lot of drama that feeds the gambling addiction with a promise of huge payoffs for the lucky few. Like an option it is a pure financially engineered gambling tool.  But an option can be converted into ownership of an underlying asset.  For Bitcoin, you simply own the idea.  It is pure gambling for the gambling junky.

Gold, on the other hand is thought of as an inflation hedge - but it really hedges the byproduct of inflation - INSTABILITY.  As faith in institutions crumble, as faith in the financial system crumbles. as faith in the political system crumbles - and most of all as faith in the currencies crumble - gold rises as an insurance policy for personal (and state) wealth,  Because Gold is its own underlying asset - immutable, untarnishable, with a 5000 year track record of holding its value against all forms of instability.

Unfotunately to addicts - it is so boring.  Often for years it does nothing but sit there.  Lumps of gold that do nothing, but sit there.  How dull.  Just like an insurance policy when nothing bad happens.  But when things go wrong, boy are you glad you owned some.

And best, of all as an instability hedge: Gold can not be hacked,  Bitcoin exchanges are constantly hacked, and once hacked their assets are lost forever.  And when quantum computing comes in a year or two, all blockchain will be obsolete.  But Gold can never be obsolete unitl humans are obsolete. It has been etched in the human consciousness for all of known human existence, and there is no reason to expect that to change.

GOLD AND CONVENTIONAL WISDOM

 

Conventional wisdom may usually be wrong - but it is instructive.  Right now conventional financial wisdom holds three things to be true: 

1) "The Fed is behind the curve."  Everyone says so.  By this they mean the Fed should have been raising rates at some nebulous point in the past.  Of course in the past nobody was in favor of the Fed raising rates.  But now everyone agress they should have done so

2) The Fed raising rates will do nothing to ameliorate the Supply Chain disruptions that are causing the inflation.  In other words raising rates will slow the economy, but they won't curb inflation, except on the demand side which is, right now, not at all the cause of inflation.

3) Everone seems to agree that the very last 2 trillion dollars of stimulus that helped the middle class were a mistake.  Not the preceding 10 trillion that the Fed took on its balance sheet to help the very rich, or the 3 trillion before that in tax cuts that helped the very rich.  Those 13 trillion were constructive and helpful,    The last 2 trillion just were giveaways that never should have happened.

Obviously, I think this conventional wisdom is fairly rediculous.  HOWEVER, when take together we can see a future that relentlessly unfolding:

FIRST, and most important, the idea that the Fed is behind the curve lays the groundwork for a general discontent with the FED.  Faith in the Fed to support the risk markets has been the glue holding the entire eocnomy together.  When the rainsing of rates slows the economy and inflation proves to be persistent - people will continue to criticize - and LOSE FAITH in the FED.

SECOND: Because everyone can see the supply chain disruptions are causing inflation there will be a strong call for the Fed to ease when their rate raising significantly slows the economy.

THIRD: There will be a great reluctance to bail out the middle classes and the poor - which will lead to massive unrest.

So what does that tell us about GOLD?

It tells us that the current price rise is only a prelude.  THese developing conditions will create a perfect storm for gold: High inflaion, Slow Economy, Loss of Faith in institurions, and general unrest.

INVESTING"S BIGGEST LIE - OR DUMBEST THOUGHT

 

It is a truism in investing that the markets are looking nine months to a year into the future and discounting what they see.  

That is so dumb.

The markets are comprised of many humans.  Humans look into the past for guidance as to what may happen in the future.  The markets similarly are looking into the past for guidance.

If they were looking into the future they would never crash as they do about every ten years and then get bailed out with infinite giveaways to the rich by the Fed and Congress.

So what do markets see as they peer into the past?  They see that every time they crash they get bailed out by the Fed and Congress - which are determined to enforce a socialism that protects the assets of the rich by socializing market losses and priviatizing market gains.

Understandably they see this repeating indefinitely into the future.

The fuutre we are facing now though is unique in that the amount of cash needed for bailouts have become so large there is a legitimate question of how much immediate harm will the next bailouts cause in terms of fueling an intorlerable infaltion?

The markets can not look into the future on that one, because it is not written in the past.

We will have to wait and see.

But anyone can make their own educated guess.