Gold: 3 Stories, One Of Them True
Gold's fall from its high of $1,921.17 an ounce in 2011 has had analysts trying to predict its direction and asking the big question: What role does gold play in the economy now?
By Vikram Rangala
Friday, March 20, 2015
In trading gold futures I've seen, as everyone has, that the so-called "flight to quality" trade has virtually dried up. It's mostly traders who are specifically interested in gold now and not, as before, traders moving between bonds, equities, and gold.
The old reliable linkage between crude oil and precious metals has gone, too. While the dollar has pushed both commodities down lately, while oil was dropping in late 2014, gold was rallying.
TRUST DOWN, GOLD UP
Gold has historically been the place you go when you think you can't trust anything else. That's what took it to $1,921.17. Quantitative easing had some people predicting the collapse of the dollar and runaway inflation.
It spawned the creation of gold-only ETFs and fed on the fears of those looking for an end-of-the-world narrative. Add in the politics of those who hate the Fed and call for a return to the gold standard (as if that were possible) and you have a lot of people buying not so much a commodity, but a story.
With the strength of US equities, the continued strong creation of jobs and availability of credit, there's plenty of other quality to fly to. No one would argue that moving money out of an equity index fund into a gold ETF would have been wise any time in the last two years.
If US stocks start to slow their bull run, Europe will become more attractive, and if the dollar can be kept from squashing them, emerging markets remain attractive to many investors.
TWO STORIES: BOTH FALSE
So there are two basic stories. The first is that the stock bubble will burst, Europe's QE will fail, China will fizzle, Japan deflate, and all those gold bears will get a big "I told you so" from the gold bugs as they wipe away their tears with their now worthless notes of fiat currency.
The second is that gold is inherently worthless, a relic of primitive times, and the world is finally catching on and as more people wake up to the truth, gold will slide into oblivion and be replaced by cryptocurrencies and, I don't know, online "karma points"?
All right, I'm taking both views to extremes, but I'm not far from what responsible people are saying. Bloomberg View's Barry Ritholtz has long followed the gold narratives and some of the odder tales in the collection.
THE 6,000 YEAR BUBBLE
For the bullish, gold's decline was going to be halted by various white knights, including India's easing of import duties (which added maybe 0.5 percent to the price), a Swiss ballot initiative to keep 20% of the Swiss National Bank's reserves in gold (3/4 of voters rejected it), and most recently and ridiculously, the Apple Watch, which was supposedly going to consume one third of global gold production. (7 watches = 1 Tesla)
The bears got an odd bit of support last year from Citigroup Chief Economist Willem Buiter, who wrote that gold is really just a fiat currency with no intrinsic usefulness or value. He compares it to the giant stone discs used as money on the island of Yap, a comparison also made by Milton Friedman (PDF).
Buiter said gold is actually in a 6000-year bubble. Of course, he added that the bubble could also continue for another 6,000 years, so no worries.
His point, that gold is basically worth whatever we agree it is worth, is valid. That observation is neither bullish nor bearish. It's just saying, as Ritholtz puts it, that the price of any commodity, or anything, is whatever the next person is willing to pay for it.
THE TRUE STORY: A FOLK TALE
The Yap stone money analogy brings me to the third story, which I heard as a child and which I submit to you gets closer to the truth about money, though it's a folk tale.
There was an island, the story goes, where young men would indicate their desire to marry a girl by leaving a stone disc in front of her house. The larger the disc, the more of a catch the boy was and, as you might guess, the more beautiful and desirable the girl was.
So once upon a time, all of the island's girls were vying for the interest of the most handsome and strong bachelor of all, who was said to be carving a suitably large disc out of the limestone on the far side of the island.
All the girls, that is, save one. She was generally believed to be the plainest. While the other girls spent time dressing up and flirting with the boys, she was always working, looking after the elders, minding the children, cleaning, and helping with the cooking. With all of that work, she was sunburned and more muscular than girls were supposed to be. In short, she was helpful, but nothing special.
Then one day, everyone awoke to find standing in front of her plain, neat little house the most massive stone disc ever seen on the island. Why would the handsome bachelor leave it for her? Was it a mistake? He could have any girl on the island, after all.
But he said no, he wanted only her. And the disc wasn't even half big enough to match her value.
Well, you can guess the rest. After the initial shock and jealousy, the rest of the islanders started to reevaluate the plainest girl on the island. They started to notice all the things her new husband had quietly observed in her and gradually realized she was very special, after all.
And the plainest of girls began to carry herself like a person of great value, which only made her even more kind and helpful.
All because of a worthless stone disc.
TOKENS OF TRUST
So why is that folk tale the one I say is true? Money is a token of trust. Yes it's just paper. And yes, it's just a shiny metal. Our culture is full of tales of those who hoarded gold and money and died broken-hearted because they lost sight of what those things really were.
They are ways of saying to one another, I believe in you and in myself and in our ability to increase the net happiness of the world through the things we do together. Whatever the token, what we're really exchanging is our faith in you and me and the power of we, to do good and useful things with the time and resources we have.
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