The Asset They Love to Hate …
Back in the 1960s, Alan Greenspan wrote a well-known essay that to this day is an essential read for anyone who wants to understand the present-day monetary and economic system (which is a kind of “fascism lite” type of statism, masquerading as capitalism) and especially the almost visceral hate etatistes harbor toward gold. Greenspan’s essay is entitled “Gold and Economic Freedom”, and as the title already suggests, the two are intimately connected.
Alan Greenspan in the mid 1970s – although he later turned out to be a sell-out, his understanding of economics undoubtedly dwarfed that of his successors at the Fed (and we are not just saying this based on the essay discussed here).
Photo credit: Charles Kelly / AP Photo
What makes Greenspan’s essay especially noteworthy is that it manages to present both theory and history in a concise, easy to understand manner. There isn’t a word in it we would change. At one point, Greenspan provides a brief history lesson. Yes, the (relatively) free banking era in the United States in the 19th century involved fractional reserve banking and as a result, there were frequent boom and bust cycles. However, since there was no “lender of last resort” with an unlimited money printing capacity, these business cycles were sharp and brief, and the market economy quickly righted itself every time:
“A fully free banking system and fully consistent gold standard have not as yet been achieved. But prior to World War I, the banking system in the United States (and in most of the world) was based on gold and even though governments intervened occasionally, banking was more free than controlled. Periodically, as a result of overly rapid credit expansion, banks became loaned up to the limit of their gold reserves, interest rates rose sharply, new credit was cut off, and the economy went into a sharp, but short-lived recession. (Compared with the depressions of 1920 and 1932, the pre-World War I business declines were mild indeed.) It was limited gold reserves that stopped the unbalanced expansions of business activity, before they could develop into the post-World War I type of disaster. The readjustment periods were short and the economies quickly reestablished a sound basis to resume expansion.”
Alas, these relatively harmless business cycles provided interventionists with an opening to implement their central planning wet dreams, even though their ideas were based on what can charitably only be called appalling economic ignorance. This economic ignorance informs the monetary system to this day and we have nothing but contempt for these planners and their intellectual handmaidens.
We cannot quantify it with any precision, but we believe it can be taken as a given that they have retarded economic progress by an order of magnitude, for reasons of compounding alone. Based on historical data, we would estimate that average real annual growth would have been at least twice as large since 1913 than it has actually been if the economy had remained free. Compounded over more than a century, this is basically the difference between what we have today and the universe of Star Trek.
US GNP per capita in the decades before the establishment of the Federal Reserve: equitable and strong growth, unmatched before and ever since – in spite of fairly frequent boom-bust cycles click to enlarge.
As Greenspan notes:
“But the process of cure was misdiagnosed as the disease: if shortage of bank reserves was causing a business decline — argued economic interventionists — why not find a way of supplying increased reserves to the banks so they never need be short! If banks can continue to loan money indefinitely — it was claimed — there need never be any slumps in business. And so the Federal Reserve System was organized in 1913.”
At the conclusion of his essay, Greenspan makes clear why the welfare/warfare statists just hate gold with a passion bordering on hysteria:
“Under a gold standard, the amount of credit that an economy can support is determined by the economy’s tangible assets, since every credit instrument is ultimately a claim on some tangible asset. But government bonds are not backed by tangible wealth, only by the government’s promise to pay out of future tax revenues, and cannot easily be absorbed by the financial markets. A large volume of new government bonds can be sold to the public only at progressively higher interest rates.Thus, government deficit spending under a gold standard is severely limited. The abandonment of the gold standard made it possible for the welfare statists to use the banking system as a means to an unlimited expansion of credit.”
In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. If there were, the government would have to make its holding illegal, as was done in the case of gold. If everyone decided, for example, to convert all his bank deposits to silver or copper or any other good, and thereafter declined to accept checks as payment for goods, bank deposits would lose their purchasing power and government-created bank credit would be worthless as a claim on goods. The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves.
This is the shabby secret of the welfare statists’ tirades against gold. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists’ antagonism toward the gold standard.”
This always was and remains true.
Bought Off Intellectuals
All the “justifications” for today’s system we hear from the supporters of the centrally planned fiat money dispensation are nothing but propaganda. This propaganda includes a number of historical lies (such as the old canard that “governments had no choice but to abandon the gold standard if they wanted to rescue the economy”), commingled with theoretical assertions that have been thoroughly refuted countless times.
One of the latter is that an economy allegedly cannot grow unless the money supply grows as well (the truth is that any money supply is as good as any other, and in a free market prices would simply adjust). Another is that central banks need to be able to apply their “scientific monetary policy” to make up for the alleged deficiencies of the free market. In reality, central banking and fiat money have slowed real economic growth to a crawl and have produced boom-bust cycles of ever greater amplitude. Something like the “Great Depression” would never have been possible without a Federal Reserve and two heavily interventionist governments coming to power in a row (first Hoover’s and then FDR’s).
The assertions listed above and similar ones are reiterated sotto voce by countless mainstream economists and the entire mainstream financial press at every opportunity. Hoever, this should be no surprise: The Federal Reserve has practically bought off the entire economics profession (incidentally, so have other central banks and assorted state-funded institutions).
“The Federal Reserve, through its extensive network of consultants, visiting scholars, alumni and staff economists, so thoroughly dominates the field of economics that real criticism of the central bank has become a career liability for members of the profession
One critical way the Fed exerts control on academic economists is through its relationships with the field’s gatekeepers. For instance, at the Journal of Monetary Economics, a must-publish venue for rising economists, more than half of the editorial board members are currently on the Fed payroll — and the rest have been in the past
A Fed spokeswoman says that exact figures for the number of economists contracted with weren’t available. But, she says, the Federal Reserve spent $389.2 million in 2008 on “monetary and economic policy,” money spent on analysis, research, data gathering, and studies on market structure; $433 million is budgeted for 2009. That’s a lot of money for a relatively small number of economists.
In a free market, the market value of thousands of today’s hyper-specialized macroeconomists would be a tiny fraction of what they get paid by the State. In an unhampered free market economy, many of them would probably be forced to actually perform productive jobs. There would of course still be room for economists, but only the most committed and talented among them would could hope to receive funding. Absolutely no-one would bother paying for central planning advice or statist propaganda, that much is absolutely certain. Obviously these economists are highly unlikely to bite the hand that feeds them.
As Hans-Hermann Hoppe has noted in this context:
“There are almost no economists, philosophers, historians, or social theorists of rank employed privately by members of the natural elite. And those few of the old elite who remain and who might have purchased their services can no longer afford intellectuals financially. Instead, intellectuals are now typically public employees, even if they work for nominally private institutions or foundations. Almost completely protected from the vagaries of consumer demand (“tenured”), their number has dramatically increased and their compensation is on average far above their genuine market value. At the same time the quality of their intellectual output has constantly fallen.
What you will discover is mostly irrelevance and incomprehensibility. Worse, insofar as today’s intellectual output is at all relevant and comprehensible, it is viciously statist. There are exceptions, but if practically all intellectuals are employed in the multiple branches of the state, then it should hardly come as a surprise that most of their ever-more voluminous output will, either by commission or omission, be statist propaganda.”
Economist Hans-Hermann Hoppe – a strongly committed enemy of the State, as the following quote illustrates: “[The State is] an institution run by gangs of murderers, plunderers, and thieves, surrounded by willing executioners, propagandists, sycophants, crooks, liars, clowns, charlatans, dupes and useful idiots – an institution that dirties and taints everything it touches”.
Photo via libertarianin.org
Given that intellectuals have great influence – the masses typically follow their lead, whether consciously or not – we shouldn’t be surprised that this “viciously statist propaganda” has become a hallmark of the mainstream press as well. This brings us back to the topic of gold.
Premature Grave Dancing
Readers may have noticed that there simply is no other asset that provokes more intense hatred in the mainstream press than gold. When the gold price declines as it has done since 2011, the press is literally brimming over with Schadenfreude, grave dancing exercises and anti-gold tirades. The lengthy preamble above is an attempt to explainwhy this is the case.
Intense grave dancing – the poor fellow at the bottom is Mr. Gold
Engraving by Michael Wolgemut
Simply put, gold is the one asset that provides the most reliable indictments of central economic planning and the abominable monetary and economic system that has been forced on us by the etatistes. In spite of its innumerable failures, socialism and its close cousin, modern-day corporatism (i.e., crony socialism), remains highly popular with the intellectual class, as it provides it with influence and money beyond its wildest dreams.
Unfortunately, it is even more popular with big business. The handful of large corporations that are controlling the press these days are not exactly big fans of the free market and its unfettered competition either. Established big business organizations prefer to keep upstart competition suppressed by means of obtaining privileges from the State. One would think that business should be against the over-regulation that characterizes today’s bureaucratic Leviathan State. This is not the case: Since it harms small emerging competitors more than established businesses, they are actually in favor of it.
Needless to say, the most powerful industry of modern times, the fractionally reserved banking cartel, is one of the biggest beneficiaries of the system and as such provides sheer unlimited funding to keep things right as they are.
When gold’s fall accelerated recently, we have seen an outpouring of doom-saying and thinly disguised contempt in the mainstream press that actually puts everything seen before into the shade. In a way this is surprising; after all, gold is a completely unimportant asset, right? Just think about this for a moment. If another currency, such as e.g. the yen, suffers a big decline, is it subjected to even remotely comparable vitriol in the press? Here are a few examples from the last week or so (with a few comments by us interspersed):
From Bloomberg (Bloomberg belongs to a limousine socialist, and is well-known for its pro-central banking/ pro-money printing and anti-gold editorial line. Some of the most ludicrous articles about gold ever published have appeared on Bloomberg):
Gold Slump Not Over as Speculators Go Net-Short for First Time – apparently Bloomberg’s authors have yet to hear about contrarian signals.
Gold Is Only Going to Get Worse (“Our survey shows a majority of traders and investors aren’t optimistic”) – indeed, Bloomberg seems to be blissfully unaware of contrarian sentiment analysis.
Good Luck Bargain Hunting for Gold Miners – naturally, gold miners are even more doomed than gold itself…
From the Wall Street Journal:
Let’s Get Real About Gold: It’s a Pet Rock – actually, as we have previously pointed out, it’s a door stop, not a pet rock. We should perhaps mention here what Jason Zweig, the author of this WSJ article, wrote in 2011 right at gold’s peak. From Mr. Zweig’s WSJ Article of September 17, 2011:
“Growing numbers of investing experts have been declaring that gold is a bubble: an insanely overvalued asset whose price is bound to burst. There is no basis for that opinion.”
With respect to gold miners (which since then are down by more than 80%) he opined:
“But there is one aspect of gold investing where it is possible to make rational estimates of value: the stocks of gold-mining companies. And, by historical standards, they seem cheap—based not on subjective forecasts of continuing fiscal apocalypse, but on objective measures of stock-market valuation.”
This is really a textbook example of how market sentiment works.
Study predicts gold could plunge to $350 an ounce (i.e., here come the extreme predictions, the inverse of the vast bullish consensus and the extreme bullish predictions that were made at the peak by gold bulls)
And all of this was finally crowned with the following pronouncement in the Washington Post:
Interestingly the author of this article, Matt O’Brian, actually gets one thing right, although his conclusion remains utterly wrong – he writes:
“When you think about it, a bet on gold is really a bet that the people in charge don’t know what they’re doing.”
That’s exactly what it is Mr. O’Brian. The wrong conclusion he comes to is this one:
”But economists do, for the most part, know what they’re doing.”
Yes, in some parallel universe perhaps. That people can profess such beliefs after the twin debacles of the tech and housing bust and after yet another giant asset bubble has been blown by these “economists who know what they are doing” is truly stunning. How blind and naïve can one possibly be? This article is a good example of statist propaganda. Our wise leaders know what they are doing! How can anyone doubt it!
Just to make this clear, we are not critical of people making bearish forecasts on gold. This is perfectly legitimate, especially as gold’s fundamental drivers have at best been stuck in “neutral” for much of the time over the past few years. Occasionally, gold’s fundamentals have switched to slightly more bullish, and then have quickly flipped back again to slightly more bearish, while its technical condition wasn’t much to write home about.
Gold primarily has vast bullish potential. The factors that are currently slightly bearish could very easily and quickly flip to outright bullish. Gold bulls have the laws of economics on their side: the greatest post WW2 experiment in global money printing on a grand scale is apodictically certain to fail and will likely result in one of the greatest economic busts of modern times.
Still A Contrarian’s Dream
We find the reactions in the press interesting for the following reasons:
Firstly, as mentioned above, we find it absolutely fascinating that gold is getting so much attention. The etatistes are apparently truly afraid of gold. If it were up to them, it would probably still be illegal (just a guess, mind).
Secondly, we also find it fascinating (and a bit depressing) how woefully uninformed the commentary on gold generally is, and this does not only apply to gold bears, but to gold bulls as well. There is hardly any market about which more nonsense is written than the gold market.
We have discussed this at length in previous articles on this blog, such as “Misconceptions about Gold”. Robert Blumen has contributed two excellent essays on the theoretical background that explain how exactly the gold price is formed (in “What Determines the Price of Gold” and “Misunderstanding Gold Demand”). In a somewhat dated “Update on Precious Metals” we provided a list of the most important fundamental drivers of the gold price (you’ll have to scroll down a bit to the section Fundamental Drivers of the Gold Market). We should also mention Keith Weiner’s frequent “Monetary Metals Supply and Demand” reports, which delve into the nitty-gritty of whether or not the metals are moved by developments on the physical side or the actions of futures speculators.
In spite of all this information being available for free on the intertubes, we notice that even gold bulls are still wasting time talking about things like jewelry demand and mine supply. Others keep going on about central bank buying and gold buying in China, often asserting that “demand evidently exceeds supply”, even in the face of a declining price. Demand and supply are always in balance. Price informs us about the relative urgency displayed by demanders and suppliers, and when the price declines, it indicates that the former aren’t sufficiently enthusiastic. The fact that gold moves from warehouse A (in, say, New York) to warehouse B (in Shanghai) has nothing to do with it.
Thirdly, we regard the excessive grave dancing, and the utter conviction with which gold is declared to be “doomed” as an outstanding contrary indicator. It means that a major trend change has to be very close. This is not to say that gold cannot fall further in the short term – technically it certainly continues to look weak, and the price attractor at $1,040-1,050 presumably still beckons. However, we believe that the long term outlook has greatly improved by the three waves of extreme bearish sentiment we have seen since 2013 (at the summer 2013 low, the late 2014 low and currently).
Even in the short term, it seems that chances are very good that a substantial rally will develop. For instance, the Daily Sentiment Index (DSI) of futures traders has recently fallen back to a record low of just 5% bulls on two consecutive occasions. A recent report by EWI contained the following chart illustrating the situation:
From 98% bulls at the top to just 5% bulls back-to-back – how sentiment on gold moves from one extreme to another – click to enlarge.
A similar message is conveyed by sentimentrader’s gold optimism index, an average of the most important gold sentiment surveys and positioning data, which we already shown in Bill Bonner’s recent article “Gold Miners, RIP”. Currently the “Gold Optix” is at its second-lowest level in history, undercutting even the low recorded in the year 2000, at the bottom of a 20 year bear market:
Gold market participants haven’t even been this bearish back in the year 2000 – click to enlarge.
As might be imagined, other market positioning and sentiment data all convey a similar message: small speculators hold a large net short position in gold futures, managed money is net short gold futures, Rydex precious metals assets are close to “wipe-out” territory, closed end bullion funds trade at vast discounts to their net asset value, GLD keeps losing gold, etc., etc.
In short, everybody knows gold can only fall further and is positioned accordingly. If there is one truism about markets one needs to be aware of, it is this one: What “everybody knows” isn’t worth knowing. Naturally, all those who have maintained a somewhat positive view on gold in recent years (including yours truly) look like idiots right now – but there is considerable potential that assorted gold haters will be invested with this particular mantle over coming years. Don’t worry, we’ll needle them right back. :)
As we have already mentioned in our missive on the recent “Gold Panic”, when everybody in a market is looking in the same direction, it is time to pay close attention. Contrarians should really love the current juncture in the gold market. At the very least, a playable counter-trend move should be close at hand, and perhaps a long term turn is actually finally in the offing. After all, the market has by now finally more or less replicated the mid-cycle decline of 1974-1976.
Lastly, we are actually gratified by the fact that assorted etatistes still seem so preoccupied with gold. This is a sign that gold remains an important monetary asset, one that continues to stand tall as an indictment of central economic planning, socialism and corporatism in all its forms. Even after having declined by roughly 45% from its 2011 high, gold is still up by more than 3,000% against the US dollar since the latter was cut loose from its tie to gold by Nixon’s default in 1971. This means that even with gold under pressure for four years running, the dollar has still crashed by 97% against it since 1971.
There is little question which currency is more useful to preserving value and protecting savers and property rights, and which one is more useful for the depredations of a greedy and insatiable Leviathan State. Hence all the gold hate pouring forth in the mainstream press. It will be interesting to see what happens once the collapse of fiat money against gold resumes – especially as we think it will do so with a real bang.
What remains of the gold stash of the Bank of England
Photo credit: Caters News