investment tips

Gold has intrinsic value

Posted by

0

Pure brass door handle which has intrinsic value

 

I have nothing but disdain for the view that gold has no intrinsic value.  A friend sent me a link to Howard Marks most recent newsletter, “All that Glitters“.  Marks is the chairman and principal of Oaktree Capital, which largely invests in distressed debt.  If that works for him, brilliant.  But perhaps pressure from clients has caused him to defend himself regarding his firm’s failure to have any gold exposure.  It leads him to write the following nonsense (emphasis his):

There’s little intrinsic to gold that enables it to serve as a store of value and a hedge against inflation. Gold serves those purposes only because people impute to it the ability to do so. It’s self-deception, nothing but the object of mass hysteria like that exhibited in “The Emperor’s New Clothes.” Gold has no financial value other than that which people accord it, and thus it should have no role in a serious investment program. Of this I’m certain.

Marks continues by saying that currencies are also flawed in this regard, but no matter.  Gold’s value is only what people impute to it.  His main point is that currency investments create cash flow, but gold doesn’t, and therefore it is not a safe investment vehicle because it depends entirely on this uncontrollable factor of what value the “people” place upon it.

Gold however does have intrinsic value.  So much, in fact, that one would never imagine using it as a door handle in the place of brass–unless one had a security detachment to guard the handle from theft.  Stylish brass door handles are expensive, though well within the price range of the average house owner.  But even brass has intrinsic value.  So why do people insist that gold has little or no intrinsic value?  Because they have completely lost a grip on reality, that’s why.  Gold would make better door handles than brass because gold doesn’t tarnish.  It would make prettier counter top than stainless steel.    Gold makes better cutlery than tarnishable silver.  And why don’t jewelers use brass in jewelry?  Because after a year or two brass jewelry would look hideous–just like the brass handle to our front door.

This whole “gold-has-no-intrinsic-value” mantra is so pervasive that Marks entitles his letter, “All that glitters”; this line of traditional wisdom that says more fully, “All that glitters is not gold.”  This is a warning that while there may be all kinds of things that are as pretty and shiny like gold, they are not substitutes for the real thing and that one should not be fooled by them.  So those who use this saying to insult the intrinsic value of gold are turning the traditional wisdom on its head and claiming that gold may glitter but its not gold.  What nonsense.

It is true that precious metals fluctuate in value day to day.  But this is due largely to the increased instability in the value of fiat currencies.  Central banks have tacitly instructed the public that these instruments have no value by artificially setting the interest rates at or around zero.  I believe that gold will only exit its current bull market if interest rates are allowed to return to market rates:  I would guess that means they must rise to about 25%.  Paper currencies which have no deposit value, i.e., they cannot create adequate cash flow when deposited in savings accounts, GICs or even government debt instruments, cannot compete with hard money (gold and silver) which have intrinsic value.

Intrinsic value and the world-wide Nouriel Roubini bubble

Posted by

5

Nouriel Roubini warned the world one year ago that gold was very likely in a bubble at just below $1200.

Gold prices, you will have noticed, have been rising sharply, breaching the $1,000 (U.S.) barrier and, in recent weeks, rising toward $1,200 an ounce and above. “Gold bugs” argue that the price could top $2,000. But the recent price surge looks suspiciously like a bubble, with the increase only partly justified by economic fundamentals.

Roubini has a PhD and is a professor of economics at New York University’s Stern School of Business. But still he writes that gold has no “intrinsic value”:

But, since gold has no intrinsic value, there are significant risks of a downward correction.

I found it remarkable that an economist didn’t have the slightest clue of the meaning of the term “intrinsic value”: an instrument of currency is said to have “intrinsic value” based upon the market value of the medium on which it is transmitted.  Since gold had a market value of nearly $1200 per oz, it had an intrinsic value of nearly $1200 per oz.  Since paper on that day had much less value, then dollars printed on paper had less intrinsic value than had it been minted on gold.  I therefore responded on the Globe and Mail forum as follows:

There seems to be a world-wide Roubini bubble. All his cautions are justified because in a bull market any asset class may be overbought and enthusiasm will temporarily wane. But it remains a long-term bull market for gold because there is already inflation, quite the opposite of what Roubini claims: Food, energy, and real estate (at least in Canada) are on the rise because of the “liquidity”. A “massive wave of liquidity” is a sudden excessive supply of money itself, which is another way of saying “inflation”.

Roubini is misguided about the meaning of “intrinsic value”. Gold is and has been, throughout human history, the very essence of intrinsic value; gold has never needed anything to back it, but has been used to back other kinds of money, and it maintains its value better than many other asset classes.

He is mocking us all and seeing if anyone out there will believe him. Ha ha, very funny Mr. Roubini.

A certain Anton B. Nym responded in agreement with Roubini:

Gold truly has very little, almost no, “intrinsic value”. It isn’t used in daily life; you can’t eat it, burn it, wear it to stay warm and dry, build a shelter from it, or even make much in the way of tools with it. (Though it is handy in the manufacture of electronics and a few esoteric processes.) Historically gold’s value comes from its malleability and lustre as well as its ease of refinement and relative scarcity. Whatever value we invest in gold is mainly esthetic and traditional… and thus subject to change by whim and fad. At a grand an ounce, and with the world economic situation gradually improving, I don’t see the current fad lasting much longer.

I responded to this reader of the Globe and Mail as follows:

Anton P. Nym: Your view of “intrinsic value” is far too utilitarian. Roubini is an extremist who’s gone off the deep end on this point. Gold has no intrinsic value? Give me a break.

Gold is beautiful to look, easy to forge, very malleable, and never tarnishes. It is rare and is the subject of metaphor and poetry. Many things that you can’t eat, burn, build a shelter or even make tools with have great value. Consider the song, “Happy Birthday” has made the owner of its rights millions of dollars in royalties. And what value has that except that it has become the tradition to sing it at the joyous occasion of celebrating one’s passage into another year of life. Small amounts of gold next to my wife’s heart have reminded her of my love for her and have made her feel good about herself. That is invaluable to me. Try giving your wife a barrel of oil on the occasion of your wedding anniversary and see if she says, “O thank you so much for giving me something with intrinsic value!”

Well, with gold at over $1370 a year later, I suppose Roubini is still waiting for the gold bubble to pop.  Don’t get your hopes up Prof. Roubini!

I guess the opinion editor thought that my rebuttal of Roubini and his ilk was witty (page no longer available at the globe, here is a screen snip).

Why you can’t pay me to own Berkshire Hathaway

Posted by

3

To my post “Warren Buffet Redux“, a certain Johnson responded by linking to an article on Buffet’s support of the sterilization of poor people.

This puts Buffet and all his activities beyond the pail for me.  I used to praise his charitable giving.  But now that I see a portion of it is used to exterminate the poor, I am utterly disgusted.  He has the attitude of the Aschen in the episodes of Stargate SG1 2010 and its sequel 2001 (see synopsis below).  The attempt to control the population of a people is an assault and an attack.  I consider it evil.

Synopsis:  The SG1 team meets an advance alien race called the Ashen, who promise to give to earth advance technology to protect them from their enemies the Goa’uld, to provide long life, and to end their problem of over population. SG1 later learn 9 years later however that Ashen’s purpose was actually to wipe out the entire population of earth and to take over its resources.

The gold ponzi scheme II: Jim Rickards’ anecdotal evidence

Posted by

2

A few days ago, I suggested that paper gold was ponzi scheme.  Banks are selling unallocated gold certificates to customers on a fractional reserve basis.  This is what is called a “naked short”.  It is naked because the banks don’t have access to the assets to cover their short.   Jim Rickards reported an anecdote that would verify this very point in an interview with (hat tip Business Insider’s Gus Lubin):  The owner of a ton of physical gold, who had placed it in safe keeping at a Swiss bank, recently asked for delivery, and it took the bank a month to comply with his request, only after requests from lawyers and threats to expose the bank publicly.  The story is told at about the half way point on the MP3 that can be heard here.  The best explanation for this delay in delivering their client’s gold is that that the bank had shorted it, and it literally took them a month to buy back the ton of gold; but they were supposed to be holding it in their vault for the client.

Needless to say, I’m not investing in banks–even the “safe” Canadian banks like the Bank of Nova Scotia; my last position was closed when I bought back a put option on BNS on 21 Oct–I’ve become convinced that banks are far too complicated for a simple guy like me to own.  When they have to cover the gold and silver that they’ve shorted, it will make the sub-prime mortgage crisis seem insignificant by comparison.  Yes, they have shorted silver too.  This is the conclusion of this video (@ 26:35):

Peter Schiff is a mensch

Posted by

1

I enjoy the tenacity of Peter Schiff and his willingness to speak against the consensus. Schiff has been consistently critical of the debt bubble in the US and he predicted the fall of housing prices in the face of mocking and shouting down by other “experts”.  Consider this 2006 video from Fox News:

For a long time, Schiff has recommended precious metals and continues to do so despite many who say that gold is “hyper-overbought” (Dennis Gartman, September 29–when gold was trading at $1300).  Against those who think that there is a gold bubble, Eric Sprott claims, “I am pretty convinced that gold will go a lot higher because it is under-owned as only 1 per cent of people’s money is in it.”  Now, there is a new Tech Ticker debate between Peter Schiff and Gary Schilling.  If it is appropriate to call people who insist that gold is the best investment as “gold bugs”, then Gary Schilling is a “bond bug” because he is inflicted with a disease now appropriately named as “Fiat Currency Fever“, the irrational view that the US dollar is a the best and safest investment–despite the severe and secular bear market that the dollar has suffered since 1971 when it was taken off the gold standard.  At a certain point, Gary Schilling claims that the Federal Reserve doesn’t create money–a trillion dollars that banks have received from the Fed is just sitting in the banks.  But unfortunately Schilling seems to be dead wrong on this point, because the banks have been lending this money to the US government, and it has actually gone out into circulation in the form of food stamps, federal employee wages, unemployment benefits, Social Security benefits, etc.  There is some serious monetization of debt going on in America (cf. Monty Pelerin), for Bernanke is trying to re-inflate all the bubbles.

Despite being right most of the time, Peter Schiff still faces fierce opposition from critics, including economists–you know the guys with PhDs, who claim that gold is barbarous relic.  I agree with Schiff.  For I believe that only God can create something out of nothing, and when a central bank expands the volume of fiat money inflation is the inevitable result.  This is an immutable law of economics.  When hyperinflation hits in earnest, then all those who own precious metals will be very thankful that they listened to Peter Schiff.