The Gold Conundrum

piece of gold from a long-defunct bank

Gold is a funny old material, really. Even in trying to photograph this lump, which is the only example of gold that I have in my physical possession, that I saw the numinous hold that the lustrous metal has had on humankind through the ages. It’s only worth about a twenty pound note *

* depending when you read this that statement may of course be wildly wrong. It  was right-ish at the beginning of 2011

It was given to me many years ago by someone in my family, not as long ago as when I heard the story of inflation, but a good few years ago – I don’t think the issuing bank is still in existence.

But that’s one of the beauties of gold – it has value because of what it is, not what it represents or who issued it. Time and bad government policy gnaw at the value of that twenty pound note over time, but like the Fallen, time does not age gold, nor does it turn to rust. It is one of the last atavistic race-memories of a time when the value of currency was inherent, not symbolic, a throwback to barbarous times, of swapping animals and goods and even human beings.

People turn to gold in troubled times for many of the other reasons that Spengler listed in his treatise on the Decline of the West – they hark back to the supposed security of the youth of their civilisation, when the layers of complexity upon complexity didn’t obfuscate all meaning in the all-pervasive fog of millions of transactions. It tickled me to hear the hints of this called out in this post

I wish I hadn’t sold my Gold and General Fund back in 2007 – not so much for the performance since then, but so I wouldn’t have to worry about whether I should buy some now to protect me from the indisputable currency games going on. There’s a lot of fear and momentum in the gold price, in my view.

Gold is all about fear. I’m not so sure that it’s so much about momentum, but I defer to Monevator’s greater experience 😉 Or perhaps I do agree with him about momentum – but not the momentum that he is talking about, which is presumably the momentum of the gold price measured in pounds (or USD etc)

The trouble is, as you jump from a skyscraper for a delirious few seconds it looks to you that all the windows are going up… It may well be that the gold price is all about momentum, but the momentum is not the price of gold measured in pounds. It is the momentum of the pound measured in gold, as the pound races downwards in value. Gold is simply the skyscraper, perhaps it isn’t moving, but it is performing the unique role it often does. Maybe it reflects back something of ourselves and our greedy ways… In finance Gold performs some of the functions of the luminiferous aether that lent an external absolute reference point to the physical sciences while they still needed it. So too, in finance, we prefer to have a definitive answer to ‘how much is this worth’ that holds meaning across the years, rather than the sordid “£19 in 2010 pounds”, where you know it will be £19 plus some uncontrolled amount in a decade hence.

Gold is both an Investment and not an Investment

My gold (and silver to some extent) ETFs are an investment in one sense. I bought them to provide a counterpoise to some of the volatility in my ISA when the net worth of the ISA was what I targeted.

I observed that gold and silver tended to move in opposite directions to the stock market, equities are buoyed by greed and sunk by fear whereas gold is buoyed by fear and sunk by greed. Particularly when the fear is existential, and is about the financial system itself. It is a swing component of last resort, but unlike income asset diversification it has a bad side-effect. If your gold holdings in your ISA are all that stand between you and financial Armageddon, you are already in the danger zone and on the way down, because your assets are not under your control.

I target income now for my financial investments because that is what I want. Although it is possible to convert capital growth into income you often end up eating transaction costs or having to batch transactions. My ISA savings are smaller than a pension as they will be a top-up, so I am more exposed to this than most.

We have been here before, though not in my lifetime. In troubled times, gold is not an investment. It is money. I have my asset allocation wrong. Gold should be in physical form and part of my tin hat portfolio, because gold is money. There must be a hermetic seal between the two, because bad money drives out good. No part of my tin hat portfolio should depend upon the finacial system. Unfortunately there’s a great big lump of it in my ISA, which is treating gold as a speculative investment. The incorruptible nature of gold is what makes it a store of value, and in this regard it is quite unlike most non-financial investments, which are usually lumpy, illiquid, non-fungible and have an alarming tendency to decay over time.

We invented money for a good reason, and it is just a shame that we can’t stop democratic governments over-promising to too many people and craftily increasing the money supply to deliver. If we could trust them to not stealthily trash the store-of-value function of money we could rely on the financial system to store value as well as using it to facilitate payment and trade.

Gold and the Austrian School

The wavelike movement affecting the economic system, the recurrence of periods of boom which are followed by periods of depression, is the unavoidable outcome of the attempts, repeated again and again, to lower the gross market rate of interest by means of credit expansion. There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.

Ludwig Von Mises

You know how it is, when you get on a bus, sometimes you take a sneaky look around at your fellow travellers. Sometimes they’re a reflection of part of you. Well, I am not sure I feel total fellow feeling here, and the Austrian School is to my mind extremely right-wing (and I’m hardly a bleeding-heart liberal all the time, but I was brought up to not actually kick people when they are down) and at times has a harsh, almost Calvinist view of the world, and I don’t go with the Calvinist angle one little bit.

On my bus I find approval of ticket scalping (ticket touts to us Brits) and a pretty heady deconstruction of the welfare state. You shouldn’t always judge a chap by the company he keeps, but it does sort of make me want to pinch the shoulder blades together a bit to present a smaller area for the stiletto knife in the hands of another co-rider!

History may not repeat, but it can rhyme

Ludwig’s History of Money is quite fascinating history lesson from the last time this all went belly-up in the West. Let’s just say that although Weimar Germany screwed up in an exceptionally big way, the only thing that helped Britain around that time looks like being able to call on the resources of empire, which in the end was not enough to hold the line.

Mises was talking about the actions of the Federal Reserve Bank of New York, who seemed to do for the Bank of England what the ECB will probably do for the profligate PIGS this year.

It didn’t work for the BoE which surrendered the gold standard in September 1931 – Mises report absolutely drips disdain for the lack of fiscal integrity on page 451.

Some commentators like Barry Eichengreen’s Golden Fetters put the fact that Britain had a relatively good Depression compared to the US down to the fact that Britain came off the Gold Standard earlier. That’s not the sort of thing that the Austrian School has a lot of truck with, the light of human compassion burns a little less brightly here when it interferes with the important business of getting the fiscal situation right.

There is a distant drum-roll that has been heard before

The more I read of the early part of the 20th century, the more I recognise similarities with now. Then it was Great Britain, catastrophically wounded from the costs of the First World War, which was thrashing about trying to preserve its Imperial lifestyle while the upstart United States was in the early stages of its economic ascendancy.

Presumably the nascent successor to Ludwig Von Mises is already living now who will be writing the report of how the behemoth United States, thrashing about to try and preserve its unsustainable lifestyle while the upstart Chinese, Indians and others don their napkins and prepare to dine out on the carcass of the once-powerful bankrupt West headed up by the United States. Sic transit gloria mundi.

A hundred years will probably have passed from the toppling of the last reserve currency from the throne to the end of the US dollar reserve status, as its creditors begin to suspect that while the head and torso appear to be noble metals, the feet are of clay, and will fail the world in its hour of need.

Some things just are. You may not like ’em, but ignoring them doesn’t make them go away.

Where I am with the old boy Ludwig is that some things just are. You can’t make them go away by dropping money from helicopters to make up for the money you used to be able to borrow from the Chinese to keep the party going. I find you have to take the world as it is, and modify your actions to adapt to it, rather than take your actions as you’d like them to be, and modify the world to conform to that model.

It’s easier for me than for a government to accept that, because a government can make it look like they can beat the world in submission and make it do what they want for a while. Thus they can stop exams telling people that they are stupid ensuring that no child gets left behind. Until, that is, we start losing jobs to countries that still discriminate academic ability, like Germany and many Asian countries. No failures means no successes.

Much in life is an inherent polarity, and just like you can’t get rid of the South pole of a magnet without destroying the North pole so too you can often not KO the undesirable without kissing goodbye to the desirable that it keeps in balance. Want to eradicate child poverty? You can do that, but you will end up sponsoring the feckless instead. Want to live beyond your means? You can do that too, but it may mean you’re skint later on.

Governments can do all sorts of stuff to make things look different from how they are, because they have more power than me. If I charged about saying day is night, or that all people have the same ability, people laugh at me. If I’m a government, they end up voting for me 😉

My gold and silver are in the wrong place

I have managed to stitch myself up over the past year – my holdings of virtual gold is in ETFs is because I viewed gold as an investment. It is, sort of, it is a hedge against the debasement of the currency, plus some variability due to the usual fear and greed.

The corollary of Ludwig’s angle is that gold and silver belong in my tin hat portfolio. My ISA is predicated on the assumption that Britain is booming again, and that China and the United States will lead a global mega-boom lasting for the next 40 years, which ought to see me out. Actually I can’t really bring myself to believe such arrant tosh as the HSBC megaboom. Exactly what part of peak oil, resource crunches, overpopulation and environmental degradation do they not understand at HSBC? On the other hand I can see they need to talk their book, and nobody got rich telling their customers “You are hosed. Adopt the brace position right now”.

However, gold doesn’t belong in my ISA. It is a bugger, as you can’t just take money out of an ISA and buy sovereigns with it, so I have a significant amount of wedge stuck in the wrong place. The other trouble with gold is it never, ever, under any circumstances pays an income. Which is also sub-optimal for an ISA, which is a way to turn income into non-income from a tax POV.

I guess I could turn that round, and think of it as an opportunity to put more into my ISA than I could have done this year, by liquidating my Gold ETF and buying equities, and mustering extra savings of equivalent value to go to London and buy some gold coins…

a photographic aside

Photography is ‘painting with light’ and when you take a picture of most things, like a sunset, your cat or your mother, you think of taking a photo of them – something that is essentially of them. Though my engineering background made me fall into the same traps Ken Rockwell berates, sometimes I can jump over that, to become a competent photographer with the occasional flash of something better.

Getting this average photo of this pedestrian piece of gold was in fact far harder that I expected. For it is in the nature of gold that for it so speak to you visually, its essence is in how it reflects the world – it has no inherent lustre, unlike your cat or mother-in-law…

take 1 - the dispassionate observer shot. Okay for the police forensics department, but this photo of the lady won't launch a thousand ships...
Take 2 - bit of a museum shooter's approach, depth of field gives some tactility, but no soul
take 3 - only by reflecting some of the observer back to himself can the yellow metal begin to speak