Gold's three M's

I’m still amazed by how little people understand of gold.  

It is clearly a massive indication on just how effective the government propaganda machines have been in the era of worthless, backed-by-nothing paper.  But gold is now starting to stand up and speak for itself.  Gold prices expressed in paper currency terms will keep rising, occasionally suffering sell-offs, but marching steadily higher nonetheless.  Can we reach $10,000/oz?  Yes.  Can we go even higher than that?  You bet.  Voltaire said in the late 18^th Century that all paper currency eventually tends to its intrinsic value, zero, and when the US dollar’s debt metrics finally topple over, the 80-year experiment with un-backed pieces of paper will come to an end. 

To fully understand gold and why its price expressed in paper currencies must keep rising, you need to know gold’s three “M’s”:

Money, Manipulation, and Misunderstanding. 

Money 

Gold is money and money is gold.  That’s the first M you need to get because it really is everything – the beginning and end of any discussion on gold.  The other two M’s follow from this fact.  Not only is gold real money, but all other forms of money used in history have been a distant second.  Fiat paper currency is at best a money substitute, but nowhere close to real money. 

Why is real money gold, and not stones, seashells, cattle or paper notes?  The answer is actually simple yet deeply profound and clearly still enough of an enigma that so many of the best and brightest struggle to understand it.  Money, through its primary function as a medium of exchange, is humans’ means of escaping the laborious and hopelessly inefficient task of bartering.  Money frees up time and allows for specialisation and integrative productive processes.  It allows us to store value created in the past based on the fact that it can be used in exchange in the future, sends meaningful and otherwise complex price signals to producers and consumers, and offers a uniform system of value measurement and accounting.  Money is, quite literally, a gift from God. 

Gold (and silver) has been proven by history and thousands of years of trial and many errors to be the best substance to fulfil the above role.  People have tried to use cattle, but it was not divisible, and neither was it uniform, durable, or portable enough to withstand the rigorous demands of the market for money.  They’ve tried seashells, until someone figured out that a trip to the beach was lucrative and destroyed its value.  Governments tried to mint less precious metal such as copper or other alloys, but could never ensure enough scarcity of supply to maintain value, rid the system of forgery, or concentrate enough value in the coins to make the money conveniently portable.  Governments have tried paper, but it was too easy to print out of thin air and countless regimes from the Weimar Republic to Mugabe’s Zimbabwe have utterly destroyed paper’s value. 

Throughout this process of men, leaders, empires and governments ignoring gold as real money, vast wealth has been destroyed, transferred or confiscated unjustly, particularly as the state has tried to foist its chosen form of money on the people.  Time and again, year in year out, century in century out, millennium in millennium out, the people choose gold as money.  Writing for the Mises Institute Robert Blumen cuts to the heart of the issue of why most erroneously believe gold is no longer money, 

“Their error was the assumption that political institutions have the final say over what is and is not money. But this is not so: the market has final say.”

 And explains, 

As societies moved from barter to monetary economies, different goods were in competition with each other for use as money. Over time, as monetary exchange expanded in proportion to barter, some commodities were found to work better as money than others, until only a handful of them became “acceptable to everyone in trade.”[9] Those were gold and silver.

Manipulation

Because gold is real money, it is the prime target of state, government or central bank manipulation.  “Give me control of a nation’s money” Mayer Amschel Rothschild famously said in the 18th Century, “and I care not who makes her laws.”  Well, monarchs and governments already knew this.  Roman leaders tried to monopolise gold, as did king Solomon in Jerusalem a thousand years before them.  Then with the advent of the classical gold standard in Britain around 1700, gold began to be centralised fully under state control as the state issued legal tender paper notes redeemable in gold. 

While certainly a far better monetary system than we have today, it remained a coercive one that relied entirely on voluntary discipline by the government not to issue more notes than gold could back at the prevailing fixed gold price. 

But when gold became too much of a disciplinarian on governments who wished to expand welfare programmes and pay easily for their wars, governments inevitably rebelled and started to try force gold into the dark basement of monetary history, issuing instead more and more un-backed fiat paper currency.  From Roosevelt in the 1930’s to Nixon’s supposed final nail in gold’s coffin in 1971, the state quickly took total control of money, fully unhinging it from any solid backing, and embarked on total manipulation of gold. 

The market’s verdict was swift, and by the end of the ‘70’s the gold price expressed in US dollars and other currencies was exponentially higher than the $35/oz in 1970.  By 1980 the situation had become untenable.  The only way for governments to ‘prove’ that their money was good enough was to raise interest rates in a Draconian fashion (US interest rates jumped to 20% under Regan/Volker), making the opportunity cost of holding gold prohibitive to doing so, and selling or leasing their vault gold into the market. 

The period 1981 to 2001 was such a time of manipulation as governments tried to restore the perception of paper currency, and diminish the perception of gold.  It was a classic example of state vs market, and for two decades, state won.  Governments discouraged gold as a monetary metal, insisting it had industrial and jewellery value only.  Inflationary periods for paper currency were countered by massive gold leasing and selling into the market by central banks, so the gold price kept falling, giving the false perception of paper currency success. 

Since 2001 gold has broken out of its manipulative shackles, although the end of the successful central bank manipulative era is probably best marked by Gordon Brown’s Bottom, when Britain sold vast quantities of gold into the market at its secular bear market low point of around $250/oz in 1999. 

Now, central Banks have far less gold in their vaults and individual gold ownership is climbing.  The scope for manipulation is fading, although governments will not go down without a fight.  People have to understand that governments will always try to manipulate, control, and monopolise gold because it is money.

Misunderstanding

Lack of knowledge and understanding of the first two “M’s” is why gold remains the most misunderstood good.  Financial analysts, investors, fund managers, shop keepers and paupers all have a similar understanding of gold – next to nothing.  If they claim to understand the metal, it’s usually a misunderstanding. 

Most people I engage with on the subject usually dismiss gold as a barbarous relic, think buyers of gold are silly, and think the current bull market is driven simply by sentiment.  Wrong.  Gold’s current bull run is no less than the market’s verdict on failing paper currency.  It is mankind’s perpetual and ancient vote for real money.  It is the ever-approaching triumph of market over state.  It is a quest for sound exchange and a just, accurate store of value and unit of account. 

That so few people realise this still means that the gold price expressed in paper currency has a lot further to climb.