Mandel was being sarcazmik.

We are not going to go through hyper-inflation, not with a 20% unemployment rate. Sectors of the economy might hyper-inflate like food, but the housing markets will continue to deflate. Bankers are not circulating the money from the government, so although interests rates are low, no one is getting any money. That is a great thing. We need to wean ourselves off the idea that we need loans to start businesses.
You don’t in most cases and if you do, you can give a % away of your business to private investors or you can borrow from non-banks that are not tied to the funny money machine that is taking for nothing. Only give value to those that have value.

gil right. gold is purely the holding pen until the storms passes.

@KevinC

“but the housing markets will continue to deflate.”

Never fear, the government is here to not only subsidize the lending industry, but also the buyers themselves!

Under the guise of “helping” buyers with tax breaks, the government is actually propping up housing prices and who could blame them?

They’ve “invested” trillions into this game and if lenders are too big to fail then the government sure as hell is too big to do so as well.

This definitely doesn’t qualify as socialism, though. Just keep using words like “market” and “privatize” and it’s gotta be capitalism!

Although I am not as bullish on gold as most others of the Austrian persuasion, I thought the article was awful and poorly written.

Right off the top, he states that the only people who buy gold are crazy conspiracy theorists…very insulting.

Historically, the stock market keeps pace with inflation better than gold, and if you really wanted to bet on significant inflation occurring, the best move would be to acquire fixed-rate debt.

For example, I currently have a 5% rate on a home I recently bought (30-year term). That’s 93% of the principal in total interest over the life of the loan, or 2.2% annualized.

The annualized rate of inflation since 1913 (based on CPI) is 3.2%, 3.6% since 1948 (when the economy normalized after the New Deal/WWII), and 4.5% annualized since we closed the gold window.

After a quick look at the numbers, my mortgage rate will be negative over the long term, even over the short term. And if we have hyperinflation, my debts will be wiped out. There’s a strong likelihood that the price level will double over the next 10 – 15 years, which means that my mortgage will be halved in real terms.

Same goes for auto loans right now too. Probably the best thing to do right now is to go out and buy a 3+ year old car for a fixed rate, 6+ year note at about 7%.

The average American’s purchasing power is higher right now than it will be for a long time (if you look at borrowing costs). But once the economy recovers, I expect inflation to go on a tear.

Like others who think they are analysing the situation scientifically, the author fails to realize the difference between Token money currency and actual value.

Gold, real estate, are commodities with actual value and paper money has only debt value, which is negative until paid. They don’t understand that value is not measured scientifically just by counting the number of tokens you have. That is not a measure of value, it’s a measure of quantity.

I agree that Money Magazine should change it’s name to Fiat Money or Paper Money or Monopoly Money Magazine. They obviously don’t really understand their subject!

“Gold prices fell in 14 out of 20 years between 1981 and 2000, and finished that two-decade run having dropped by more than half — and that’s before the effects of inflation are considered.”

http://www.kitco.com/charts/historicalgold.html

“…having dropped by more than half ” – Half of what? Half the soaring price level of $750 it had reached by 1979. It fell over that period until it hit “bottom” by 2000 at $250/oz, still 7 times the price it was when Bretton-Woods succumbed. Part of this decline in price is due to correction in the market after debasing the currencies caused the soaring price bubble. The other part of the fall is due to direct action by the Fed and other Central Banks through short selling of gold to boost Fiat money value. The Greenspan years…

And he stops there at 2000 because as you can see from the chart, the big bang starts from there!
2000 – 2010 the increase is from $250/oz to $1150/oz. Considering that gold held it’s value/dollar for 120 years without the Fed at approx. $25/oz, and post Fed rising to $35/oz by 1972, $250/oz is very very high in a very very short time period. To say that this price is low is stupid.

For the years 1981 – 2000 he says “and that’s before the effects of inflation are considered.”

OMG! What the heck does he think is the scientific comparison here? Before inflation is considered? The commodity prices are what DEFINE inflation!

And just like other “mere commodities”, when priced in fiat currency, there is no comparison of actual value, so the price fluctuates. That is not due to the properties of the commodity but instead to the variable value property of the currency! What a moron!

I’d like to see him give his wife an Origami Ring made from a TIPS certificate or a T-bill! I bet he doesn’t get laid for it!

Bullets are definitely intrinsic value commodities! I wonder what the historical price chart looks like for Bullets? That might be an interesting study!

“The reality: Even China is wary of gold prices rising too much.”

Here’s another one. Of course they are! It shows the real value of the dollars they hold in US debt paper is falling! That is precisely the reason for the short sales by the central bank. Gold is still the standard of value even if it is not the base of the currency exchanged. China holds silver, lots of it, and that too is a commodity money and it’s value/dollar is rising as well. China does not want it’s foreign debt paper to loose value in the market.

“Even with its recent purchases of gold, China still holds 20 times more of its reserves in the greenback than in gold.”

That’s because they need greenbacks to trade with the US. Duh. Most of their reserves are in Silver any way. They hold enough Silver to cover the greenbacks 100% and still have some left over. They are buying gold, probably with dollar reserves, in effect converting some of their reserves to a more stable form.

In his last years, Hayek suggested a free market of money. And why not? Oh, because the fiat governments wouldn’t like it.

Gold has many uses, but because it is so rare, its best use ultimately is as money.

All,

I don’t think its safe to assume all Austrians are bullish on gold. As I pointed out earlier, gold is overvalued by most monetary valuation methods.

Can any you gold bulls tell me how/why you believe gold is going to go up? Because if you’re looking at the money supply, the current price is non-justifiable.

Gold is currently trading at ~50x the historical price for a ‘gold dollar’, has the money supply grown that much?

Nick,

It does indeed seem likely that gold now has a higher real purchasing power than its historic norms. Based on the current purchasing power of the dollar and the current dollar price of gold, my guess is that gold is running about 50% to 75% higher than the norm. All other things being equal, it is reasonable to expect gold’s real purchasing power to decline in the long run. However, there are other several things one needs to keep in mind.

First, one can’t assume that a correction will come in the form of the dollar price of gold falling. Instead, we may see the real purchasing power of the dollar collapse. Or looking at it from a dollar-centric perspective, dollar price increases in gold are simply leading the dollar price increases that are likely to affect other goods in the near future.

The explanation for this time lag in dollar price increases is simply that gold, because of its monetary qualities, is often the vehicle of choice for people speculating on future dollar declines. Compared to other commodities, gold offers high marketability together with low storage and transaction costs, and has virtually no supply shock risk due to its great durability and ease of recycling in various forms.

If you’ve been paying attention to the American financial situation, you’re probably already aware of the reasons why speculators would bet against the dollar. The Fed’s bailout of the big New York banks involved the creation of gigantic bank reserves and other Fed deposit obligations (on the order of $1.2 trillion), together with the complete devastation of the quality of the Fed’s own assets. Short of ruinous interest rate increases, there doesn’t seem to be any way of preventing those reserves from eventually generating massive inflation as the economy joblessly “recovers” from the Greenspan-Bernanke Depression.

Moreover, the federal government itself is running massive deficits, and can no longer count on Asian central banks and sovereign wealth funds to bail it out. In all likelihood, they’ll massive inflation just to monetize the debt and keep the government afloat.

Second, the demand for money or quasi-money commodities is strongly influenced by real interest rates. In principle, various kinds of securities could serve as inflation hedges if they offered a high enough rate of return. However, when real interest rates are low or even turn negative because of high rates of dollar depreciation, perpetual “stimulus” of the credit markets by the central bank, and threats of increased taxation, one could pay a premium (in terms of real goods) for an inflation hedge and still get a better rate of return than what an equity or a bond might offer. In other words, expected declines in gold’s real purchasing power might be offset by even larger expected declines in alternatives to gold.

In recent decades, negative real interest rates have been strongly correlated with run-ups in gold prices. That seems to be what has been happening lately, especially when you take into account the liklihood that realistic estimates of the rate of dollar depreciation are probably several percent higher than the official CPI statistics (a more detailed case for this can be found on the web site of a friend of the above-mentioned Ralph Foster, John Williams’s shadowstats.com).

Taken together, the prospects for increased dollar inflation and the piddling returns offered by stocks and bonds (not to mention the threats of increased taxes and/or interest rates and the federal budget situation further unravels) make a powerful case for gold. Even if gold loses some of its real purchasing power over the long run, it is still a far better deal than watching your bonds hyperinflate to nothingness and your stocks hammered by collapsing P/E ratios.

Third, as is repeatedly illustrated in Foster’s book, Fiat Paper Money (which I also recommend), the thousand-year history of unbacked paper money is a sorry tale of one hyperinflationary collapse after another. In the long run, the fluctuations of gold’s purchasing power are trivial in comparison to the perpetual depreciation and inevitable hyperinflationary collapse (usually after just a few decades) that always terminates paper money experiments. It is a peculiar conceit of mainstream American economics to ignore this history, instead persisting in the belief that paper money could be made to work if only the right combination of monetary rules and central bank “independence” could save a paper money from the depredations of a cash-starved state or the corruption of the central bankers.

Given that history, it is clear that anyone needing a cash reserve over an extended period of time would have far more grounds for being wary of any “dollar bull” than of any “gold bull.” There is neither historical precedent nor any sound economic theory to support the oft-stated Establishment thesis that, in terms of real purchasing power, certain dollar assets are “risk-free” and the ultimate safe haven and can be “stabilized” by wise central bank management. Once the reality sinks in that the dollar too is at risk of hyperinflation, it’s not difficult imagining that one of the horror stories that Foster discusses might be describing America sometime in the early 21^st century.

“All other things being equal, it is reasonable to expect gold’s real purchasing power to decline in the long run.” — But all other things are likely not to be equal. If the rate at which gold is extracted exceeds the rate at which wealth increases, then yes, gold’s purchasing power will decline. But with the exception of 1849, the inequality has been the other way around: wealth has increased faster than new supplies of gold. Thus, there was historically a slight inflation in the purchasing power of gold.

Debates about investing in gold usually center around what kind of financial return you will get over what period of time. I suggest that there are more important moral reasons to invest in gold, EVEN IF YOU LOSE MONEY. Getting a good return on investment is not, for me, an adequate reason to invest in organized crime.