Money in Ancient Egypt

In my study of gold, I’ve tried to find out something about the metal in the most ancient texts.  In doing so, I googled “Gold in Egypt”, and the first hit was a aldokkan.com that made the following claims about ancient Egypt:

The Egyptian government did not maintain or needed any gold treasury, civil servants were paid in food and gifts, money did not exist until the Ptolemaic Period.

The general population did not use any gold in their daily life, and the metal had no economic importance for them.

J. T. McGee has urged  me not to believe everything I read on the Internet, and so I’d better verify the above claims.  The first text that I read that would suggest that money existed in Egypt is Genesis 47:14 (RSV):  “And Joseph gathered up all the money that was found in the land of Egypt and in the land of Canaan, for the grain which they bought; and Joseph brought the money into Pharaoh’s house.”  The term for money is keseph (כֶּסֶף), silver, and many ancient Near Eastern texts refer to the monetary use of silver, often measured in shekels–though apparently this was before the invention of coins.  So money existed in Egypt at the time of Joseph many hundreds of years before the Ptolemaic period.

For those skeptical of the historic worth of Genesis, in The Journey of Wen-Amon to Phoenicia (J. B. Pritchard, Ancient Near Eastern Texts (ANET), 25-29), a text dating to the 11th century BC, Wen-Amon travels from Egypt to Phoenicia to buy timber, but has his gold and silver stolen while harbored at Dor to buy provisions.  So clearly, silver and gold had already become money in international trade.  In The Expulsion of the Hyksos (ANET 233-234; 15th cent. BC) , a relatively common ship’s captain recounts his military exploits for which he received on seven occasions a reward of gold.  It would appear from these texts that gold was monetized in ancient Egypt, in the sense that it served as: (1) payment; (2) intermediary of trade; (3) store of value.

Why Warren Buffet is wrong about gold

NB: This post first appeared at Beating the Index.  To read or add to the comments and discussion of this post please go here.

Following the controversial Warren Buffett on Gold Investing article, I thought it would be interesting to read a different opinion on gold.  I asked my fellow blogger and gold investor Peter from the Righteous Investor if he would like to provide an alternative view on gold investing and he kindly accepted. Thank you Peter for providing us with the view from the other side.

Money is a commodity which serves both as an intermediate of trade and a store of wealth.  Money must have the following characteristics to function properly: limited quantity, fungible, portable, available.

An increase in the money supply without a corresponding increase in production of goods and services leads to inflation; inflation of the money supply leads to price increases in the following order:  (i) commodities; (ii) consumer prices; (iii) cost of labor.  Inflation therefore results in a de facto garnishing of wages.  Thus, if a government sells debt which its central bank then monetizes (i.e., quantitative easing), then government spending benefits recipients through doing irreparable harm to savers and wage earners.  Thus, if possible, retail investors must protect themselves from this harm.

Humankind has used gold and silver as money since the dawn of history.  History has shown that gold is too rare and valuable to function as the only money, for the gold standard has led in the past to scarcity, making money too little available to common people. I’ve seen first hand how scarcity of money has lead to serious problems in the Central African Republic, where the local currency is tied to the Euro, which benefits international commerce but doesn’t really help the people on the street to conduct their daily transactions because there are too few small bills and coins.  The gold standard can also lead to this sort of scarcity and that is why in the late 19th century, there were many advocates who wanted to monetize silver.  Nevertheless, the great advantage of precious metals over paper currency is the inability of a government or a central bank to create it at a whim, and therefore they are far less susceptible to inflation.

Warren Buffett’s advice about gold has had a profound effect on retail investors.  He advocates common shares in stocks as better than gold; ironically, one of the most famous articles on how companies do poorly during times of a high inflation was written by none other than Buffett himself ( “How inflation swindles the equity investor”).  So he knows very well that stocks provide little protection from inflation.  So what are retail investors supposed to do?  They can’t buy bonds or common stocks, and in Buffett’s opinion, they are speculating if they buy precious metals. But I ask, why should Buffett care?  Remember, he’s an insurance salesman and he is out to get your money.  He himself has greatly benefited from the bailouts and the monetization of the US Federal debt.  I don’t think he has the best interest of ordinary investors in mind.  And I am not alone in this opinion.

Why there is no gold bubble

An investor, particularly the value investor, must seek to avoid overpriced assets.  Value investors want to find undervalued, underappreciated investments.  There are some pretty strong reasons to believe that precious metals are oversold and not overbought:

  1. Not that much global wealth is invested in gold (see Eric Sprott and Andrew Morris).
  2. There are too many anti-gold bugs.  Despite the performance of gold in the last ten years, there are still many who, like Buffett, do not understand why it is attractive.  There is also an entire school of economics, the Keynesians, who consider gold a “barbaric relic”, and this school has an enormous influence on governments, universities, and the media.  Keynesians have been adamantly opposed to gold and silver money, because it prevents them from manipulating and controlling the economy through monetary policy.
  3. Gold is just keeping up with other commodities and is also tracking the increase of the Federal Reserve money base.  The real bubble is not gold but the US dollar.
  4. Unallocated gold and gold derivatives make up an enormous and extraordinary portion of the supply of gold in the market.  Certain banks have supplied unallocated gold certificates on a fractional reserve basis to their customers (see this explanation by Avery Goodman).  It is difficult to say how much paper gold there is, but GATA’s Adrian Douglas has estimated that there is a 40 (or as high as 100) to one ratio of paper to physical gold.  This is the crux of the matter.  If and when a physical gold run occurs we could see gold jump to 40x the current price in a few days.  For this reason, every prudent value investor should invest in some physical gold and avoid all paper gold derivatives like the plague.  The same is true of silver, but according to analysts such as Eric Sprott and the National Inflation Association, the paper to physical silver ratio is much higher than it is for gold.  This is an important warning:  Do not believe any author who says there is a gold bubble but doesn’t deal with the question of unallocated gold.  In the end, the collapse of the unallocated gold, which is so deceptively co-mingled into the gold market, may become the financial disaster of the century, eclipsing the sub-prime mortgage crisis in its wake.

How I make money from the sector

The gold sector is not safe because of its great volatility.  Since I took my first position in 2006, gold has traded in the range of $600-$1400 per ounce, and gold mining companies have experienced an even greater range of prices.  So it is inadvisable to put all of one’s saving into precious metals in a single day.  The volatility, on the other hand, lends itself to the possibility of a profitable trading scheme.  So my strategy consists of both a base position of shares that I am holding for the long haul, and the trade itself.

(1) Base position:  I started five years ago by establishing a position in Barrick Gold at CDN $33.50.  I’ve never sold those shares.  I have also averaged down, when possible  (e.g., with NGD), to establish my current position.  Here are my current positions that I have accumulated over the last five years, followed by the average cost price:

Barrick Gold (CDN $34.185; +48%), Detour Gold (CDN $14.25; +121%), Lake Shore Gold (CDN $3.41; +19%), and New Gold (CDN $1.94; +471%), Sprott Physical Gold Trust (US $12.24; +2.5%)and Sprott Physical Silver Trust (US $12.65; +37%).

Gold and silver coins and bullion must be stored in a safe place, so I wouldn’t own any unless I believed that the economic collapse was imminent.  Therefore, the Sprott physical gold and silver trusts are a means of having direct exposure to the physical metal without having to worry about being robbed.

(2) Trading:  (a) I used to trade gold mining stocks, especially ABX and NGD.  I would try to buy on dips and take profits as enthusiasm picked up.  (b) One year ago, I started to sell put options because it was safer than taking long positions, though it would reduce the upside potential of my positions.  I have been selling these puts (in ABX, GG, NGD and DGC) since 2010.  I do this trading on the US market whenever possible.  I was of the conviction that QE would cause the mining companies at very least to remain static in value vis-à-vis the US dollar, and indeed, only one out of the multiple positions that I’ve taken in put options has ever been assigned.  I try to sell the puts on dips and I will occasionally buy them back if they make considerable gains in a short period of time.

P. W. Dunn holds a PhD in theology, has taught biblical studies at the undergraduate and master’s level in Africa and Canada, and now is a DIY investor who publishes his ideas about investing and how it relates to Christianity at theRighteous Investor.  His other posts on gold can be read here.

To read the comments and discussion of this post please go here.

The Secret of Oz: Anti-central bank, anti-gold standard

This film was certainly interesting and well-made.  It is in favor of fiat money which is controlled not by central banks but by democratic government.  The title is based upon Hugh Rockoff’s allegorical interpretation of the 1900 children’s book Wizard of Oz, setting the story in the political controversies at the time of the author, L. Frank Baum (1856-1919).  According to this interpretation, the silver slippers are representative of silver money in competition with the gold standard, the Scarecrow, who is actually smarter than people think at first, is the American farmer who is destroyed by deflation, the Tin Man is the American industrial worker, who is in need of liquidity (oil), who comes along side the farmer in common cause and the cowardly Lion is William Jennings Bryan who was in favor of silver money and the US government issued greenback.  The wicked witches of the East and West were two major banks, and the water that kills the witch is the easy liquidity of the government’s own ability to create fiat currency which is not debt-based.

In my opinion the films successfully show how the gold standard can be manipulated by big banks and can have depressive effect on money–which can (1) stifle the growth of an economy and (2) create serfs out of people who cannot pay back their debts because of inadequate liquidity in the system.

The film fails to show how giving control of fiat currency to government can stop the government from politicizing the money supply and ultimately from creating hyperinflation.  The film also mistakes fiat money creation for wealth creation:  While it is true that wealth creation requires liquidity, it is a mistake to confuse wealth creation with the creation of fiat money.

I would conclude that restrained form of monetarism could be the best system in that it would grow the money supply in conjunction with economic production–but that all systems of money are open to manipulation and greed–and this is why the Austrians point out that all paper currencies eventually become worthless.  The advantage of a system of money which is based on precious metals is that neither a central bank nor a government can steal people’s wealth through the excess creation of money.  A stable currency would also encourage saving, as currency would be store of wealth.  The disadvantage of the gold standard is that liquidity can be dried up and there can arise situations in which money becomes too scarce.

The gold ponzi scheme II: Jim Rickards’ anecdotal evidence

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):

Aggresivity or Gold: what is needed in the current investment climate

These are difficult times for investors. They are wonderful times for speculators. Speculators will make (and lose) a lot of money over the next couple of years. In my opinion, investors are likely to lose. Prudent investors might better avoid financial assets for awhile. Traditional wisdom is apt not to apply to what is coming.  Monty Pelerin, “Speculators Only”

There is the saying, “Those who remain calm while others panic, don’t know what the hell is going on.” It is a troubled time and I genuinely feel bad for what central banks are doing to people’s savings. But as Pelerin says, speculators will make and lose a lot of money. The biggest winners today are those upon whom Bernanke shines his favor, such as the big banks that borrow money from the Fed and lend it back to the US federal government, which is perhaps the biggest Sopranos-type racket going: but it’s not some kind of under the table payoffs, but it’s being done right in front of all of us and with impunity.

The 2008 market crash has been particularly devastating on people’s savings. They were forced by inflation to buy so-called “risky” instruments, esp. stocks. Then that bubble burst twice in less than a decade. Stung by this double whammy to their savings, many are still too scared to bet on the market again, and so Bernanke, and the other sovereign banks around the world are robbing them blind through their loose monetary policies; the euphemism for excess money creation is “Quantitative Easing”–it used to be called just simply “inflation”.

Loose money is also created by low interest rates.  In Canada, for example, there has been something like a 20% increase in the cost of houses since the summer of 2008, due to the Bank of Canada keeping the rates at ridiculously low rates. So you can’t sit on cash–because the riskiest investment in an inflationary environment is cash in a savings account that pays 1%. Here in Canada since the nadir of the stock market crash, such cash has lost about 19% against real estate and much more against stocks and gold.  Commodity prices on world markets are rising rapidly too.  Or rather, fiat currencies are losing their symbolic value quickly.  A interest bearing GIC, savings account or bond is recipe for a portfolio with a rapidly declining buying power.

I’ve devised an aggressive and flexible investment style to beat the coming inflation, if possible.  The stock portfolio I manage is now almost all commodities (oil and gas, gold mining), 100% Canadian-based (as I live in Canada), and I am shorting the US dollar to buy these companies. I am selling cash or margin covered puts on oil and gas, gold-mining companies (etc.) for income (which gives from 5-10% downside protection) and, because I can’t trust my margin to stay high in market downturn, I am accumulating unused lines of credit (notably my HELOC) as my hedge against deflation,with the view of seizing the day if there is a market crash. I believe the investor must be aggressive and engaged–you can’t have a “lazy” portfolio today (John Mauldin said the same in his most recent interview with Steve Forbes). The goal must be to beat inflation, and the higher that goes, the more aggresivity is necessary. Or if I had to sit out as you suggest, then I would put most of my funds into silver, gold, non-perishable foods, or other commodities–things with durative and intrinsic value (gold and silver are liquid and so are excellent choices, but you have to have a safe place to put it).

Most people’s best hedge against inflation is still their mortgage, as Bernanke’s devaluation of the dollar will also reduce everyone’s debts. It’s the Year of Jubilee, when everyone’s debts will be canceled, especially the Federal government’s. Or as Dickens says, “It was the best of times, it was the worst of times … ”

This post is a revised comment that was featured today at Monty Pelerin’s blog, “One man’s approach to investing in dangerous times“.  Thanks Monty!!

Please read my financial disclaimer, if you haven’t already.