Why Your Gold is Worth(less)- Just Google It



I recently penned a column about what I perceive to be a bubble in the price of gold, and was lambasted (100 times over) by the goldbugs, who shouted so high and loud I went deaf, leaving “gold is the only Real Wealth,” the last syllables that will ever ring in my ears.
Is what they say true? And what then constitutes, “real wealth?” Is it having large stacks of green paper with deceased U.S. notables on them? Is it having bars and bars of gold stacked in your basement, a ton of wheat from which you can make flour and baked goods, or a lot of zeroes on your bank statement?
Currency is supposed to be a representation of value, a fluid way to exchange goods and services, long ago replacing the barter system,which inherently contains more friction, and thus inefficiencies. We all know what we’re willing to exchange for a dollar today, both in our time and energy expended in earning one, and in return, the goods and services it will enable us to buy.
Now, with government debt, and central banks rapidly printing money, an effort to relieve irresponsible politicians of their mindless, and often corrupt, budgetary allocations of resources; gold bugs today argue that the metal will rise dramatically higher as it is the only "true" protection against inflation.
Gold- it looks pretty- I'll give it that

My argument in my column, was that gold has outpaced the Consumer Price Index, and that the current price of the metal is out of alignment compared to the basket of goods that an ounce of it could purchase during periods when the price of gold was relatively stable. By the logic of my argument, we would have to see a doubling of the CPI (a total of 100% inflation) for the current price of gold to be on par with values it held in past years.
Gold bugs counter that the money supply has grown faster than the CPI, yaddah yaddah yaddah .. And you know what, they’re absolutely right. So the question becomes, why have prices of other goods and commodities not risen in direct proportion to the amount of money being printed?
And here, we begin to begin to talk about the creation of “real wealth.”
The wealthiest individual in the world in the year 1600 was, let’s say, the King of France or the Sultan of Turkey. They had gold stacked to the roof, but no matter how much gold they owned, it would still take them ten days each to travel to the beaches of Italy, whereas the average American today can travel to Rome from across the ocean in ten hours. How much of their gold would the kings of yesteryear be willing to exchange for that?
Why Gold is an antiquated notion- sure it's pretty to look at, but so what?
Did the Wright Brothers create real wealth and value with the invention of the airplane? How about Boeing and Air Bus, who every year makethis invention a little more efficient, safer, and cheaper, allowing the masses of the world to see far away places that only a select few people from centuries ago could claim to have spent their whole lives travelling to? Real wealth? Definitely.
How about milk and eggs, commodities used daily by much of the world, the demand for which have only increased as populations have risen, yet their prices have increased far more slowly than the money supply. Why? Competition, new technologies, and efficiencies have allowed for increased production and distribution.
How about my favorite company, Google. I mean, Google, the Internet, and Wikipedia, with their organization of information, have had such a radical effect on the world that the sole remaining purpose of a public library is to give hobos a free restroom to use. ** Sound of librarians slamming their non-electronic books down; whatever those are.**
Look, librarians, I’m jesting. Of course I know the hobos are allowed to nap as well.
Do you know how much more efficient Google and the Internet has made the world, how easily know-how and knowledge today can be spread and gleaned? What used to take the resources of cutting down a tree, printing words on paper, delivering it, heading to the library, locating the appropriate book (the non-electronic kind, whatever those are) can be done in a matter of minutes on your home computer.
Everyone benefits. That frees up time that people can spend elsewhere, increases efficiency at work, makes society more productive; now That, is REAL WEALTH.
And there are a ton of other examples of this: Caterpillar’s cranes replace the Egyptian slaves of yesteryear, (even if we still couldn't build the pyramids,) Ford’s assembly line, the IPhone, hell, toss in the invention of fire and the wheel.
And as long as innovators, dreamers, and inventors are willing use their genius, their know-how, and intuition, and work together to create new products and technologies, the world will continue to grow more wealthy; Real Wealth will continue to be created. And if currencies are what the true leaders of capitalism are willing to accept in exchange for their contributions, then gold will never shoot the moon without some massive catastrophe taking place.
Betting on gold is a bet on stagnation of the human mind,and progress. Gold is a currency when there is faith in nothing, and maybe politicians are on their way to granting your wish, but people like Larry Page and the late Steve Jobs will be holding forever holding back the rise in the tide of gold you dream of goldie bugs.
So my advice- bet on companies that add value, invest in companies that might change the world, whether that be in material sciences, renewable energy, or software companies like Apple or Google, who re-invest their profits in far-flung projects that one day might bring us things like driver-less cars.
So go ahead all you gold bugs, keep screaming that gold has nowhere to go but up. Go ahead and keep rooting for wars, for America to go bankrupt, keep wishing Dick Cheney would get re-elected President, and keep praying solar energy will never replace oil. Scream as loud as you want, blare it from speakers, directly into my ear if you feel like it. It’s okay, I can't hear you anyways, nor can those feverishly dreaming up the products of tomorrow.

Comments

  1. Yes, they are printing a shit load of greenbacks, but gold is antiquated store of value, that is a store of value, "just because it always has been." The only value gold truly has is its industrial purposes, and its beauty that people value to make jewelry. there is a good reason to value American greenbacks, the military behind it. If you have any thoughts, feel free to counter and state them. :)

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  2. Hi Richard. First, the articles (above and the previous one about the gold bubble) are nicely written, and good research!

    I am not a good writer and definitely not a fair researcher so I apologize in advance for the bad written of my ideas below, because I also tends to let my mind and logic flows thru fast instead of refining the words and paragraph (Sounds like Google approach?). If you have anything not understand, please point it out and I can try to explain.

    The below is what I think, I hope it is right but surely nobody will ever confirm this, even well known Economists will argue this topic.


    First off, your argument in previous blog post which was very well written and well researched stated that Gold as a conversion ratio to certain daily commodities is actually rising and not dropping, so why people said gold is underpriced as it is already over-priced in historical statistics.

    In second post (above), you said that some gold bugs argued that the money supply is growing and gold price should anchored with money supply and not CPI because money supply is seen to be rising faster than the CPI as seen in the history. Yes I agree with you, I don't buy this goldbugs argument.

    Your argument then based on the economic growth and output efficiency improvement which makes the commodities cheaper (thus CPI rises slower) and this is nothing special and is a common phenomenon of a world under continuous development, so as to echoed back to your argument to not look at money supply and only comparing gold price to commodities.

    I have several points to make.

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  3. 1. Money is something people used to store value so that the value is not to be destroyed. But what is value? Is it value of commodities it can exchange with? I intend to negate this argument because as the reasoning behind CPI, if we keep amount of money (just use greenback first) exactly constant from ancient to modern, each unit of money could buy a lot more goods in modern world than in ancient world. Why? Because the economy is growing and output is thriving. Mankind is producing more and more goods to circulate on earth and if money supply is keeping at a constant, the commodities price should fall and money should rise, which is a phenomenon of deflation, despite this is called healthy deflation due to world economy output improving.

    So, my argument goes to that commodities prices fluctuate due to usage and supply and demand, many factors. Yes, coal and oil is valuable and have many uses today, if tomorrow people can find a way to dig oil from moon and transport back to earth in a cheaper and more economical way, the price of energy (incl oil and coal and others like solar or uranium) will likely to fall, supply demand and substitution. Value of a unit of money (if money supply stable) is not to be fixed with price on commodities, especially with a few decades or hundred years ago.

    2. Now I start to argue that Gold is of no use except one (forget about those tiny usage on beauty and industrial use). Gold is money, a store of value, that is its primary usage from ancient world. I won't argue it is the ultimate form of money without flaw and substitution. It's substitution products in modern world is mainly greenbacks, which the federal reserve promised to regulate the circulation to mainly price stable (CPI stable). In late 20th century, yes people did trust greenback to be better money because gold is still lacking several advantages vs money and thus gold temporary lost its value as a money. Once it loses status as a storage of value, it devaluated fast, yes gold is of no use… It's called competition of money (?)

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  4. 3. Now I argue that gold is starting to earn back its value storage status because governments from all over the world seem to tell people that they are printing the money to solve problems and disregard the price stable objective. Sorry that they have to achieve this by downplaying the effect of rising price in the core CPI (from rising oil, import goods from china) by excluding oil from core CPI (they say it fluctuates!) and balancing out by statistical techniques (like the productivity increase in iPad = deflation factor because newer iPad2 is faster), who knows the iPad is 2X faster can improve the world efficiency by 2X of the factor of the first iPad? Assumption only. But the government is able to exploit this to hide the actual rise in price in other commodities and services.

    Gold is starting to shine again as trustful storage, at least the supply is limited, despite still growing a bit. Note that this trend favors gold and goldbugs argument of end of the world scenario when greenback is no longer trusted as money, but now, let's just assume gold is equal as greenback and both are trusted as money, and forget about the future change in competition of status, just focus on demand supply.

    4. Here goes my logic: Commodities and money are two different worlds. They both subjected to variance and fluctuation of demand supply and competition and affects it true value. If people want to value commodities, greenbacks and gold, please separate them into 2 categories and value. More commodities with same money, value goes down => deflation relative to that money. Money supply goes up (or commodities go down in case of econ crash?) then inflation against the money. Just that. You can substitute the word money by Gold and Greenbacks.

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  5. 5. Here comes a game called Diablo II, which i learnt some economy 101. The story below I altered the real game facts a LOT to emphasize my ideas.

    In this game, there are a lot of weapons and treasure dropping off from game server which people will trade them, first by barter and then a common medium emerged, by rings. 2 rings, called Ring of Soul (ROS) and Ring of Jordan (ROJ) are treated as money because they are relatively rare and also dropping off from game server so the rings number will grow approximately with the user and activity base, at least the players at the beginning thought so. Few players actually use them as they are of no use to the game play.

    Game server treats the drop off probability of items approximate by stable ratio when monsters drop (e.g. 1 in 10 for magical items, 1 in 100 drops for rare, 1 in 1000 for super rare and incl ROS) which proportional to activities of players, except ROJ, which only will drop off in 1 in 1000 at a particular level ending.

    Guess what? Players start to play other levels a lot because they could have more chance to pick rare items and also occasional ROS, and getting bored to obtain ROJ. In the market, item prices starts to fall against ROJ as more and more weapons drop off from increasing player activities. But soon enough, ROJ loses its favor as storage as it has no use and soon some people starts to sell ROJ to convert to ROS because of more convenient conversion ratio. (You trade ROJ for a bunch of rare items , usually you only like one of those in 1 trade batch) ROS started to rise against ROJ and becomes more popular for std exchange unit. Trade system developed and even web pages describing item markets quoted in ROS...

    The server continues to run and here some hackers started to discover how to create ROS from nowhere, despite not in overwhelming amount. At first the community doesn't know but started to feel more ROS in the market and item prices started to rise. They explain the situation is due to some latest play style which favors particular items and cites that there are indeed some items keeping stable prices. What they don't know is that some those items can either also be created by other hackers, and some not created, yes because those items are starting useless in latest game play style.

    Prices continues to rise and one day news broke out that ROS is flooded because hackers are creating them. Now some players started to convert their ROS back to ROJ because they think it is more safe, ROJ price rises again. But most players remain calm as they already get used to the prices system in ROS and once the server fixed the problem and stop the hackers they don't think they have to trade ROS for inconvenient ROJ.

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  6. The server identified the problem but sorry they can only identify which ROS are fake but the hackers cannot be stopped. The server administrator is quite honest and disclose this to the community to let them decide.

    A. The server let the hackers activities continues, the ratio of hacking is still low and only contributes slight continuous rise in item price but nothing else. Players will have to tolerate this as a part of the game.

    B. To block and cancel all fake ROS in the system identified. Players who got fake ROS lost their value, but everything will be right again.

    Guess what? They seem to understand that the server cannot stop the hacking but people will still choose option A because no one wants his own ROS in the chest to become worthless by any chance. At the same time, more and more people convert ROS to ROJ and ROJ is rising, the storage value is back! Not just the storage value but also because some people starts to worry that the server will some day choose to cancel out all fake ROS in the system and the storage status of ROS is losing! Now it is still in a controlled manner and once the crack is broken out, what will happen? Even if the crack is not broken out, players still tolerates the system as is, what will happen? They are sure that items price will be continuously inflated against ROS and some of them are also sure that item prices will be continuously deflated against ROJ (due to drop ratio affecting the supply), unless situation change (either fake ROS stopped, or the drop ratio is altered)

    Isn't it a world we are living in?

    6. Having said the above, money is still money, a store of value. So I agree with Buffett and you totally that the way to get rich (increase wealth) is to invest in production assets, and not sitting on something useless besides storage of value. So guess what? In order to get rich fast in Diablo, don't just sitting on a pile of ROJ, go out there to accomplish missions, find treasures, maybe lure more players by some cheap treasures and have them fight for you in a party, increase the gangs and more activities means more treasures. However, if I have to hold large sig amount of rings for whatever purposes, I will consider at least a portion of it in ROJ (I make this up totally, I haven't seen this kind of contract on Diablo... :D)

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  7. Wow, what a reply. So fascinating.
    My immediate response is, as you stated at the end, there are more asset classes in our world to invest in than ROS or ROJ. I right now have a pile of greenbacks that are becoming worthless, far better to put them into a house it would seem, especially with interest rate levels being so low.
    The truth is, to store wealth can cost money, if you leave it in gold (storage) or if you leave it cash (inflation, which we have seen A LOT of this year)
    I understand at minimum most of the points you are trying to make, and I agree, the thing is that gold produces nothing. It is a pretty metal. Why not diamonds? It is arbitrary, the human mind deciding what is, and what is not valuable.
    Yes, increased efficiency does hold down inflation. Politicians being who they are, they look for the easiest way out. Printing money. Simplest solution. Thank God for the the creators, the innovators, who make our world a better place.
    I would much rather own a farm than gold, a house, a theme park. Gold will move up and down as the psychology of people dictates. I am by no means defending the "hackers at the Fed" that are printing massive ROJ's (money for those of you who didn't read Ben's posts,) I am just saying that gold as a store of value is arbitrary, and historic, whereas owning an asset that produces something is not arbitrary. It creates, it produces.
    Ben, your arguments are good, and well reasoned. I would encourage you to post any thoughts you have about anything I write. Thank you for your time, and thought provoking example!
    Question: I am not clear, the game you discussed, was that actually a game run by a college/ econ 101, or a real internet game? If it was created by a professor, I find it FASCINATING and such an excellent way to teach!!

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  8. Diablo (having version I and II) was a game developed by Blizzard and was a very famous game 10+ years ago. Community in the game was huge at that time (remember there was no social network or facebook concept that time), players communicate and trade items and accomplish missions together as a team, earning coins, treasures, weapons and experience pt. Whenever there is a large community with a certain freedom, economy occurs and you will observe quite a number of interesting things inside. Having said that, I make up the story by altering a lot of facts, ROJ is real, deflation of item prices vs ROJ is also real, hackers maybe creating characters to steal others properties but never creates rings ... lol. Appreciate that you like it.

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  9. Getting back to the topic...

    While good assets continues to produce, good companies continue to earn and invest, it is not always wise to invest those assets disregarding the price tag of it, be it the price tags in terms of USD or Oz of Gold... The money (storage medium of value) will sometimes needed to be money in the pocket until time comes...

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  10. Absolutely Ben, I 100% agree, price MATTERS, of course. The thing is price is all relative to what it can actually buy, whether that is orange juice, a house, or a computer. These assets have true value in terms of use, and the supply and demand curves will always state what these products are worth in Real terms.
    We have already seen tremendous inflation this year in the United States, and wages have not gone up accordingly. Food prices have gone up, gas too. Printing more money devalues it, that's what is happening. sigh ... it is an imperfect world, and gold is still an arbitrary store of value.
    Go Google, go Apple! Create, produce. The only thing I like abut gold is it is pretty to look at.

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  11. Yeah! Go Google! Go Apple!
    And nice discussion with you, Richard.
    :D

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