Minyan Mailbag - Gold & Fiat Currencies
Note: Our goal in Minyanville is to remove intimidation from the financial markets and encourage an interactive dialogue among the Minyanship. We share this next discussion with that very intent.
The following discussion began with a question posed on yesterday's Buzz:
"Toddo- We bought our house in August of 2000 and paid around $250,000 (the price of gold was somewhere around $275/oz). So we paid around 910 oz of gold for our house.
Today if our house value is $350,000 and gold is worth $430 per oz, then our house value is only 814 oz of gold.
Have I made money on this house? Has my net worth gone up or down?
Toddo's initial response:
The Mini-Minyan mailbag above touches on a subject that will become increasingly popular in the years ahead.
In conventional (notional) terms, the Minyan made a nice "trade" on his house. As the dollar continues to devalue, however, more and more folks will begin to question the "basis" of their investments.
The timing of that psychology shift will likely coincide to the eventual turn/top in equity markets. WHEN will that happen? I haven't the slightest idea...
I chimed in...
As per the earlier Mini-Minyan mailbag:
It all depends what people call "wealth." In my mind, total net worth is lower for sure. You may remember that I am trying to sell a horse. I have told the agent that the horse is for sale at a fixed price. The price is 750 ounces of gold.
I don't give a toss if gold is $20 an ounce. 750 ounces gets the animal. Finished. The "price" obviously fell for prospective buyers last week. But my valuation, as I measure it, didn't change. it is still worth what it was last week or the week before. Just my 2 cents worth.
And it continues today...
People do not sell horses for ounces of gold, they sell them, and virtually everything else in dollars (if you are an American), so, of course, you are wealthier. Why not express the price in soybeans or cement (if it has gone up) to reinforce your negative view that nothing good is going on. You can always find some commodity that has gone up a lot and index your stock market gains against that and say that no one has actually made any money, but it is a ridiculous claim. The last time I went to the grocery store, the department store and the gas station, they did not ask for gold or soybeans or cement but for dollars to pay my bill and my stock market gains were very welcome indeed to pay the bill. To claim otherwise is a grand illusion on your part. I welcome a dissenting opinion as to why my increased dollar wealth is an illusion.
Always good to hear a voice of dissent or opposition to views expressed by anyone at the 'ville. I will try and address your assumptions and maybe show an alternative conclusion. The underlying theme of anything I have written in the last 5 years is about the "stability" of gold versus the "instability" of the fiat system. I certainly don't want anything to do with a perceived "grand illusion" as you put it. I'm no magician (but once I pulled a hare out of my...). Grand illusion, not me, Mr. Greenspan is already looking after that little puppy.
I chose gold because it is REAL WEALTH. It wouldn't cross my mind to use any commodity or other "Index to show " - your words- "there is nothing good going on." There's plenty good going on out there. There are equity bargains galore in some sectors of the economy. There are plenty of fat targets to short sell, for those bearish folk. Currencies are a great casino at present, and even though we all know the end result, we just never know when the "house" is gonna step in. Commodities. Bonds. Plenty of good stuff going on out there.
Firstly, let's be clear, by using your measure (paper U.S. dollars), I lost "wealth" in my horse when gold fell this past week, as she is priced at a fixed number of gold ounces. In my measure, nothing changed.
Anyway, Gold is the ultimate currency and it is the paper that changes in value, not the gold. Gold is Gold, money for over 5000 years. Limited in supply, a unique and very sparsely-distributed natural resource, impossible to counterfeit (currently!), fungible, transportable - you name any property of what you consider money, and gold has it in buckets. Paper dollars fail the test. So do soybeans and cement.
Your point about using soybeans or cement is absurd. I didn't pick any commodity. I picked the only real money. Beans or Cement aren't, and never will be money. Sure, they may be a means of exchange in some crude form of transaction but let's compare them to gold as "money". Soy beans spoil pretty quickly if they don't get processed. Storage is a big issue. Supply is elastic. You want more, plant more.
Cement is just a mix of calcined limestone and clay which can be mixed with water and sand or gravel to form concrete and mortar. Therefore the stuff that makes it what it is, can be found in most backyards! It has many different specifications and strengths depending on the mix. Can one produce a pound of "pure cement"? Depends on what one decides is "pure" for their purposes. Gold, like cement, has different characteristics or grades depending on the purpose like 14carat, 18carat etc. But, it can be melted down and the alloys removed and you are left with an amount of "pure gold". Do that with concrete and you are left with some basic form of mud!
I'm sure you don't go to the shop with cement or soybeans or whatever. I don't with my gold either. But the paper you and I hand over is only worth what the government tells us it is and is backed only by a promise. Gold is gold, my friend, and you never know when you're gonna need it, even to go to the shop. Argentina 1998 comes to mind. Oh, that couldn't happen to the USA? Check out the debt, the deficits, the "empire". No country gets wealthier by borrowing more money when they can't pay back what they already owe. Ever. And the piper WILL be paid. One day.
Sure, you can use copper or lead or some other basic commodity with some longevity, but it ain't gold or silver. Try and haul around a tonne of copper - yep, only 2 or 3 grands worth, and it breaks down over time. A tonne of gold is 32,150 ounces or about U.S.$14 Million and would fit in a family sized refrigerator.
My example of selling a horse for a fixed price in gold is a real one. Horses do not trade in U.S. dollars, except in the U.S. Thoroughbreds are a global market and currency changes make huge impacts to the market and their participants. Let's use an example.
Storm Cat is the most expensive stallion on the planet. His fee per 30 second shag is U.S.$500,000. With the currency having done what it has, under your contention, clients of the owner don't care that the dollar has lost nearly half its value against the Euro. This is sadly mistaken. The owner of Storm Cat obviously wants the best mares to go to him so as to produce the best kids. Fair enough. Under the scenario Mark paints, all U.S. breeders are unaffected as the fee is in their local currency and so who cares? Well, there's a whole bunch of mare owners around the world who couldn't afford his fee with the dollar at 84 to the Euro. Others had very good alternatives elsewhere in the world. At 1.35 they all can. So we see Europeans, Aussies or Asians sending their best mares to the U.S. to be served by Storm Cat. They now can afford it, and some. This will then put pressure on the owner of Storm Cat to raise his fee as there are too many people queuing up for a shot, and he is limited to say, 130 shags a year. The price will go up for sure, but only in dollar terms. Supply-demand in action. The local's are gonna wear the pain. Or will some form of "protectionism" come in whereby only U.S. breeders get to pay X dollars but the rest pay something else?? Would a flock of stallion sales take effect due to the currency? You bet! Who owns the wealth then?
Sadlers Wells, the king stallion of Europe is earning 300,000 euro's per shag. The Coolmore guys would've worn some pain the last few years because they priced in euro's, based off Mark's measure of wealth. The U.S. breeders who want to send a mare to him have been pole-axed by the currency, yet his sperm is still the same and the euro fee didn't change?
The dollar has had a huge impact down here. U.S. breeders could access our top stallions, like Zabeel or Danehill very cheaply in comparison to we local breeders. Now they won't send their mares down here because the service fees have basically doubled for them. Service fees have actually fallen in most cases for us locals.
My mare will sell for an amount of gold that I'm happy with and if it's a U.S. buyer who's gonna throw up his hand, he better be quick 'coz its gonna cost him a lot more pieces of paper to buy the gold to hand over. But, the rest of the world's buyer get a discount as gold rises in dollar terms! Whose wealth has been affected? Gold will go up in ALL fiat currencies, in due course. It's just that some will go faster than others.
By the way, you can sell a lot of large ticket things for physical gold. You would be amazed at the reaction, especially when it is explained to the purchaser and he is shown how to hedge himself immediately, as there is generally a forward settlement date and he doesn't give a toss how many ounces I get, he's only worried about cost in paper terms. Solve that fear and it's all done. It is happening, believe me.
The logic that you earn U.S. dollars, invest U.S. dollars and spend U.S. dollars therefore leaving you with no risk or that your wealth is unaffected by the dollars decline is a rather simplistic and naïve viewpoint, IMO. There's a big wide world out there and it is getting more expensive for the U.S. and its citizens to exist, everyday. The U.S. is now the biggest economic problem the world has ever seen. Import Price increases are being absorbed at present but the pressure is building and higher prices, in dollars, are an inevitability. Then we'll be able to decide whether the falling dollar has affected your wealth. Obviously it hasn't affected your perceived wealth but an overseas trip may alter such a view. Your wealth may be unaffected when compared to others in the U.S., but mate, it's going down the gurgler when compared to the rest of the world. The world may have recently revolved around the dollar and by default, the USA, but that's changing pretty bloody quickly. Imagine U.S. dollars being shunned in Russia these days, by Bangkok cabbies or in Latin America? It is happening.
Gold and silver are the only true money in existence in the world today. Saving in Fiat Dollars guarantees you will lose purchasing power. In 1934, an ounce of gold was worth U.S.$35 per ounce. Today it is $435 per ounce. Do you agree that the dollar has devalued by 95% or so? It must have, because it's the same freaking ounce of gold and the same government backed pieces of green paper to buy it.
Anyways, I choose to sell my horse for gold because it removes all risk from the equation, I know what I'm getting and the buyer knows what he's paying.
We must agree to disagree that your wealth is unaffected by the dollar decline. Time will tell but keep on making those stock market profits to offset the coming price increases.
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