Gold is not an “Investment”

I’m really rampaging against gold this week, but I feel like many of these concepts are really important.  So I apologize in advance.  

Last week at the Orcam site I published what I believe is an incredibly important piece on the concept of investing.  Basically, I summarized the fact that none of us are really “investing” in secondary markets.  That is, when you buy stocks on an exchange you are not really an investor.  You are just allocating your savings.  Real investment is done on primary markets via IPOs or via private equity or through private purchases not consumed for the purpose of future production.   What most of us do through our portfolios is allocate savings.   You obtain income that goes unspent and you then allocate that into various asset classes like stocks and bonds.   But these assets serve very different purposes in terms of portfolio construction.

I won’t go into detail about portfolio construction and the role behind each asset class (that is a far larger project than I have the time or space for here), but I do want to touch on the role of gold.  Gold is mostly an unproductive, non-income producing asset whose value has elements grounded in its marginal productive uses, but is primarily valued based on its utility as an alternative medium of exchange (form of money) to fiat money.

I believe your saving portfolio (NOT YOUR INVESTMENT PORTFOLIO AS MOST PEOPLE INCORRECTLY REFER TO IT) should achieve two primary purposes:

1.  Protect against the risk of permanent loss.

2.  Protect against the risk of purchasing power loss.

Different assets achieve these goals in varying ways.  For instance, purchasing shares of stock in a diversified portfolio achieves both protection against the risk of permanent loss AND protection against the risk of purchasing power loss.  I would argue, however, that gold only achieves the second of these two goals.  Because gold has a heavily embedded “faith put” there is the potential for gold to serve as a very poor protector against the risk of permanent loss.  In other words, if everyone in the world agreed that gold is not an alternative form of money its value would likely crater.   When you buy gold you are not really investing (in any sense of the word).  If anything, you are allocating your savings in a manner that serves as a hedge in your portfolio against the potential loss of purchasing power.

This doesn’t mean gold plays no role in a portfolio or even that I view it as a useless asset.  But I believe it’s important to understand how different assets fit in the matrix of portfolio construction.  Because gold’s value is largely based on this “faith put” I would argue that gold serves as a riskier form of asset than many other asset classes and therefore warrants a far lower allocation when considering portfolio construction.

* Addendum – I am not saying that equities cannot suffer permanent loss.  Rather, equities ultimately represent output and human beings ultimately make progress over the long-term which increases total output.  So, in short timeframes equities can serve as a poor protector against permanent loss, but over longer timeframes serve as a superb protector against permanent loss.  


Got a comment or question about this post? Feel free to use the Ask Cullen section, leave a comment in the forum or send me a message on Twitter.

Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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  • Steve

    Cullen, have you read about the Permanent Portfolio? What’s your take on it? It tends to preserve the ‘savings portfolio’


  • Jo

    Stop being an attention-seeking tit.


  • Cullen Roche

    It’s okay. Not my preferred construction though. But far better than most of the gimmicky stuff you’ll get from Wall Street.

  • Gary_UK

    Cullen, you wrote:

    ‘In other words, if everyone in the world agreed that gold is not an alternative form of money its value would likely crater.’

    Could you explain how that point (and that point alone, to keep you on track if I can) is any different to (for example) USTs, dollar currency, shares in Apple, Junk bonds, commercial property?

    Just on that point though please (if everyone in the world turns against an asset class), let’s see if you can do it, without throwing in some other issues that might deflect away from your unfounded bias against gold. Baited breath here.

  • Cullen Roche

    People don’t just stop believing in human output. For instance, you don’t just wake up one day and stop believing that human progress matters. It’s inherent in us. We progress. We move forward. We evolve. Betting against that is like betting against the sun rising. So, betting against the increase of future output is just silly. And that’s what corporate America ultimately represents – progress. It’s not a belief. It’s fundamental. In our DNA. You don’t just believe it away. That doesn’t mean it’s guaranteed in shorter timeframes, but betting against progress over the course of several lifetimes is a very very bad bet in my opinion.

    Gold, on the other hand….

  • Gary_UK

    Yep, knew you wouldn’t even attempt to answer the question (at all).

    Waste of my time.

  • Matt


    I understand the point you are making but the anaolgy you have used to give credibility to your point is flawed in my opinion.

    Your point hinges on the summary sentence ‘if everyone in the world agreed that gold is not an alternative form of money its value would likely crater.’ You can say that about just about any physical good with a current monetary value.

    The point is that I cannot possibly foresee a scenario whereby everyone in the world loses complete faith in gold. With gold deeply interwined with religion, a symbol of power and with its importance to government policy it not only meets point 2 but also 1.

    Are you able to briefly explain a scenario whereby you invisige a complete lack of global faith in gold?

  • Cullen Roche

    You asked specifically about Apple, govt bonds and such. Assets whose viability is derived from underlying output. So I answered the question about output. Just as you asked. I’m sorry the answer wasn’t what you were hoping for. :-)

  • jaymaster

    Gary, seems to me you should be asking the gold bugs that question.

    They’re the ones who argue that gold is infallible, right?

  • Cullen Roche

    Not saying it’s likely. But I’d rather construct portfolios for clients (and myself) around things that don’t involve a large amount of hope. Hope is not a strategy.

  • Gary_UK

    Just on that point though please (if everyone in the world turns against an asset class), let’s see if you can do it, without throwing in some other issues that might deflect away from your unfounded bias against gold. Baited breath here.

    Try again Cullen. Don’t give us your reasons why it might not happen, just answer the question. Everyone is waiting now.


  • Cullen Roche

    People don’t just “turn against” assets. You’ve been predicting this for Treasuries for years now. It’s been a terrible prediction because you don’t understand the fundamental drivers behind the value of Treasuries. Treasuries and fiat are largely viable due to their underlying output. To bet that people will lose faith in US govt bonds is essentially a bet that US output will crater. Maybe you think that’s what will happen. But you’ve been wrong if that’s what you believe. And I think you’ll continue to be wrong for the long-term. There are real fundamental drivers behind US output. It’s not just a bunch of people HOPING profits and output increase. I don’t wake up every morning and HOPE that I am smarter, more productive, etc. I really do things that help me achieve these things. If you’re sitting around HOPING to grow your business or your personal output then you’re doing it wrong. :-)

  • Gary_UK

    Why can you never answer the question Cullen?

    (I know hwy by the way!).

    You are the master of twisting words, master of avoiding the question. Have you considered politics, you’d be great.

    Go on, 3rd time lucky, give it a go. Take a for example sub-prime mortgage-backed securities, or shares in What is everyone sold them at once? Hmm? Go on man, you can do it if you try!

  • SS

    I look forward to the point in 20 years when everyone realizes that the things Cullen has been saying here are just common understandings. At what point do people begin to see how right he’s been about everything and finally start to believe that what he’s saying is not just pie in the sky?

  • Cullen Roche failed because there were no profits, no output. MBS failed because they were predicated on underlying income streams that were unsustainable. Again, it’s all about underlying output. What do you not understand about that? You’re proving my point without realizing it.

    I know you hate the fact that you’ve been wrong about your hyperinflation prediction, but I am not the guy to get mad at. You need to take a look in the mirror and figure out why your predictions have been so wrong. Then you’ll start to work from a better and more knowledgeable foundation thereby improving the quality of your future predictions. Or, you could just keep HOPING for hyperinflation. And you’ll keep being wrong. It’s ironic that your lack of progress in understanding these things is the direct result of your failing predictions. See how that works? Just some constructive advice….

  • Cullen Roche

    Well, now you’re the one HOPING. I’m no smarter than anyone else. I just am not blinded by ideology and biases. My greatest strength is understanding my weaknesses….In other words, I know I am wrong a lot. I just know how to learn and adapt to that by understanding why I was wrong.

  • Ryan Melvey


    Lot’s of the PP holders (myself included) enjoy reading about MMR/MMT. You will find that the role of Treasuries in the portfolio ties perfectly with everything you write about. It’s really about passively striking a balance with regards to macro risks. Just an FYI that the construction is more sophisticated than it may appear at first glance :)

  • Gary_UK

    Oh, did I ask why failed? Nope, We were looking at what happens when everyone dumps an asset at the same time.

    You continually ignore the question. You ignored junk MBS too.

    You seem to forget people read this site, they will look at threads like this and think ‘Hmm, that Cullen is very tricky to pin down, bit oily, never seems to answer a question posed directly’.

    If you don’t care about that, then that’s fine, but please don’t pretend ignoring the question is anything to do with me and my views, that’s just another of your classic diversionary tactics, frankly I find your approach to these discussions childish, so unless you answer this particular question you will have the pleasure of losing a reader/commenter, as I hate to waste my time.

  • Cullen Roche


    There’s no such thing as MMR. It’s called Monetary Realism (MR) and it just describes the system we have. It has a lot less in common with MMT than most people seem to think. I am not sure why people keep conflating the two. They’re very very different. There seems to be a flurry of recent confusion about this. I am not sure why.

    Maybe see my MMT critique.

    Been enjoying reading your site btw. So thanks.


  • JJTV

    The only time demand would cease entirely for gold is in a cataclysmic situation (I would hoard toilet paper (for when winter comes and the leaves run out), alcohol, and seeds (true intrinsic value) in that situation) or the available supply runs out (no new demand).

    Based on historical evidence gold has been used as a token for measurement for existing debts/values but never as a “money” thing. I.e. economic agents did not arrive at gold as money but rather it arose after the creation of governments (governments created it with its value being fixed by the govt.). It appears that people still did not readily accept it (some history of govt forcing gold & silver coins on people), however, gold coins symbolized the value of an existing debt and were given as payment for services rendered to the government (exchangeable value).

    The better argument would be that gold has value because people demand it for jewelry, industrial purposes, and speculative purposes, however, its value beyond that point, if any at all, is highly questionable. It became a money thing only because governments created it for such uses and not because it arose out of the shrouds of the marketplace (no intrinsic value).

  • Cullen Roche failed because its investors thought it would generate massive profits in the future. The euphoria of the internet bubble caused people to express excessive faith in the company’s ability to generate profits. And when the economy tanked in 2002 these investors realized that the profits were not going to come to fruition. This wasn’t an act of god or faith. It was fundamentally driven. Output is driven by fundamentals over the long-term. Not faith, or hope or the like. There were real fundamental problems with the and .com business models. They didn’t just implode because people stopped liking their businesses. People realized the output wouldn’t be there to sustain the valuations or the businesses.

    I don’t know why you’re having trouble digesting that very simple and direct answer. I respect your right to ask comments here, but sometimes I wonder if you actually try to digest what I say….

  • Ryan Melvey

    Okay, I am sorry if the conflation bothered you. I know that you are differentiating yourself in key ways, and I particularly appreciate staying away from very political prescriptions. But as a consumer of economic thought, I must admit that I enjoy reading both.

    Thank you for the nice words about my site. I linked your summary in one of my posts to help explain the role of Treasuries. Thanks for all of your hard work.

  • SS

    I don’t think it’s hope. I think most of what you say just makes good sound fundamental sense.

  • LVG

    Why is it so hard for people to see the major differences between MMT and MR?

    MR believes in a market based monetary system that is designed around private competitive banking where the government just supports the system. MMT believes in a system designed around the government where the banks are agents of the government. They’re night and day. How hard is that to understand?

  • jaymaster

    I can think of a few situations where gold could lose its value as “money” or wealth:

    -A breakdown in society/civilization to a point where there is little trade, and where the focus turns to day to day survival. Give me lead and brass then.

    -A societal movement away from placing value on material wealth, or even possibly just a movement away from displaying wealth, through body adornment (which is probably one of the largest drivers of gold’s value now and in the past). This could be religious (already the case in many sects), or something more akin to a massive “hippy” movement like in the 60’s.

    -a break through in ocean mining, or possibly asteroid mining, that floods the world with cheap gold.

    And I’m NOT saying that other forms of money/securities/bonds, etc. can’t fail. They most certainly can. It’s just that IMO, gold isn’t infallible either.

  • LVG

    I mostly agree with this post. But the key here seems to be understanding what the embedded “faith put” is valued at. Is it a few % points or is gold mostly elevated due to the faith put? That’s the risk you speak of. Gold one day coming back to fundamentals, right?

  • Cowpoke

    I bought a small amount of Gold & Silver back in the mid 90’s. Paid $300+ for the Gold and $4.00 ish for the silver.
    I sold it all when silver peaked at near $50 oz.

    I made 5x on my Gold and 10x on the Silver over the course of holding it for over 15 years.

    Now that I stop and think about how much more I could have made by buying and holding the same in a stock like Apple that I bought @ $17 and then sold for $20 back then. Uggg

  • Ryan Melvey

    I am not sure that I follow you.

    Why are you using the word “believe”? I thought MR was supposed to describe, not believe. Also, I never said they were the same, I said they are both interesting and are useful to think about when constructing a portfolio. When looking at the Treasury market from an investors view, they offer a very similar framework which is what matters for a PP investor.

  • Cullen Roche

    Yes, I would say “believe” is the wrong word. Though this is obviously up for debate. To me, MR just is. For instance, we have a system designed around private banks who create most of our money. And the govt just facilitates and supports this system in various ways. It’s a private sector centric view of the world. Some theories and economic descriptions obviously disagree with this and place a certain special importance to the Treasury or the Fed. This results in saying things like the banks multiply reserves (thereby creating a Fed centric view of the monetary system) or that govt spending creates/destroys money (thereby creating a govt centric view of the world). MR describes what I believe is our simple reality. Banks create almost all of the money and the govt just supports the banking system in various ways.

  • VII

    You can call it what ever you want. It is as incorrect for them to call it an investment porfolio as you to call it a savings portfolio. Just because Wall St. spins one thing and Orcam spins it another to benefit Orcam does not make your reasoning better than the orginator.

    Gold is what it is. It’s not to be dissmissed just because you have decided to call it as unproductive. Or because Buffett has called it unproductive. Is my 17% in GDX,GDXJ,GLD unproductive? Did it not produce income or wealth for me and others? Isn’t there beauty in the idea that an “unproductive” asset that many have purchased provided income? Even though you say it provides none..merely because it doesnt’ produce a dividend? I don’t exchange it for anything other than a gain or loss at time of sale.
    Arn’t all assets “faith Puts’. thus isn’t our job to find what others are williing to put faith in faith out?
    If Dalio buys gold…and makes money in an account called an investment account is he wrong? Just because his definition is deemed incorrect by Orcam? Maybe Orcam has it backwards?
    The things is…I believe the point is to make money. Each has their way of doing it. I respect all facets of the game we play…but I’m reading more and more from you a kind of…”my way is better than yours”. When in fact it may not be. At one point you called those who wake up and look at the market “monkeys”. So…if all those traders who create wealth are monkeys and the GNP report by buffet is the holy grail of investing what value is Orcam going to provide to it’s clients?
    Why not just trade off of GNP.
    I know plenty of investors doing very well buying the asset you say is unproductive in accounts you say are “incorrect”. (I guess I’m there voice..)
    I liked you a lot better when your version of capitalism wasnt’t the final word. When your version of an account wasn’t the only correct version. When assets weren’t being defined by your push to get Orcam running.
    I have no opnion on means nothing to me. My personal view is it should be bought and sold like the guy selling trinkets on e-bay.He has fround a way to make money selling unproductive assets all day long. Isn’t that the point! why is my profession more productive then the gold brokers?? Answer: it’s not.

  • Cullen Roche


    I don’t “spin it” to benefit Orcam. I describe the actual definition. Saving is income unspent. Investment is purchases not consumed, for use in
    future production. BY DEFINITION, buying something in a secondary market is allocating savings. It is not investment. Look up the OECD economic definitions and you’ll find that I am not the one “spinning” anything.

    These aren’t my beliefs. They are facts. Wall Street spins it because “investing” is sexier than saving. Who wants to grow their money by “saving”. That sounds boring and tired. You don’t sell a sports car by discussing its safety features. You sell it by selling its sexy features. Wall Street sucks people in in the same manner with this myth about “investing”. And most people eat it right up thinking they’re on the fast road to becoming Warren Buffett (even though they’re doing something TOTALLY different from what Buffett does).

  • Alternative Investments

    I like this article Cullen. I’ve always wondered about Gold, and it seems to me that its’ almost like an obsession that some people have. Franckly speaking, it seems like Gold is more of an emotional investment, representing feelings almost ingrained in our DNA. If one wants a real asset hedge, it just seems to me that something that is based on real economic value like agricultural land, oil trusts etc. are better then gold. Does this make sense Cullen? Also, if one does believe in MMT, does that imply that something like a real asset/hard asset hedge is not even necessary, or is this a (gross) oversimplification? Look forward to feedback!

  • Cullen Roche

    Well, I don’t believe in MMT so your question kind of flies over my head. We created MR because we disagree with MMT. I am not sure why there is so much confusion about this in recent days. It’s been almost a year since I wrote anything about MMT and started MR because of our disagreements with them….

  • SS

    It’s almost like no one reads your work and they just ask random ass questions.


  • Johnny Evers

    What ‘underlying output’ does a Treasury note have? It’s a promise to pay, not a claim on future output.
    The U.S. could increase output, but decide not to redeem the note, and you’d be out of luck. The U.S. could increase output, but grow debt much faster and you would lose.
    You don’t own anything, as you would a stock or a piece of land (or a shiny gold coin.)
    A Treasury note is a promise to pay. It’s the same concept as any over investment. If you own Petco, you believe they will pay you in future earnings. If you own a Treasury note, you believe you will be paid back. But it’s much less of a guarantee that an ounce of gold.

  • The Dork of Cork.

    People need to understand the genesis of Keynesian thought and therefore its modern version MMT

    rereading “The first world war vol 1″ by Hew Strachan – the “financing the war section” – a must read.

    The Germans & French held much of the above ground gold ( not unlike China & Japan $ treasury holdings today ?)
    The UK could “print” more Gold as the Empire had control over most of the below ground stuff in Canada & South Africa.
    While India gave it a favourable balance of trade ( I think Europe of today functions as the modern India)

    OK there was a run on the BoE………in my opinion because the US became both China & Saudi Arabia in one monster package.
    The Bank act was suspended and the clearing banks expected the Gold standard to finish as the BoE would need to issue more notes , but HMT issued the notes (legal tender in Scotland & Ireland)

    Keynes hammered home 2 points – the first was the difference between the internal demand for gold and the external.
    1. The first was the internal vs external demand for Gold – the 10shilling notes (paying 5% interest) were for the former.
    By easing the domestic calls for Gold the Bank had more gold available for exchange purposes.

    2. He reiterated throughout the war that it was useless to accumulate gold reserves in times of peace unless it was intended to utilise them in time of danger.
    This is the MMT full employment meme in its ancient form.

    But if HMT just issued raw notes into the economic medium – what would have happened ?
    Would we have had the War to end all wars ?

  • krb

    He may be a little too provocative, but I appreciate the point I think he is trying to make. I also disagree with Cullen’s perceived bias or blind spot where gold is concerned. I’ll take the thousands-of-years track record of gold’s store of value and therefore use as a “Protect against the risk of permanent loss” over any “purchasing shares of stock in a diversified portfolio”… least with this article’s minimal/absent description of “diversified” and the time frame you’re talking about. I can almost guaranty a “diversified” portfolio of 8 stocks from 8 uncorrelated industries will be non-existent in 1000 years with gold very likely to retain some level of value. It is for this reason that I also believe Cullen’s view, in his addendum, on the timeframe for which stocks can provide protection is completely opposite of reality. There’s a chance 8 good companies will hold some value for 10 years…..less chance for 100 years……no chance for 1000 years. Think of the many supposedly infallible, innovative industrial giants from just the last century that no long exist. If you want to make the argument that stocks will be better protection against permanent loss than gold, you better very clearly define what a “diversified” portfolio really is and for how long you want to claim this advantage.

    Gold IS a hedge against both permanent loss and loss of purchasing power, and if you want to make it, or any stock holding, a life long or multi-generational holding of your portfolio, you risk comparable and substantial loss, or gain, in both… allocate each appropriately. krb

  • krb

    I mean Gary provoking… sorry for not re-reading.

  • whatisgoingon

    Cullen do you view gold mining equities (which arguably provide some real economic benefit although often poorly managed) different from the yellow shiny useless metal that generations have salivated over?

    Also why are Tips (which could work to preserve purchasing power) not really providing their intended benefit.

  • VII

    When Wall St. spins it because it’s sexier is that bad? Let’s start with that. I don’t think so.
    When wall St.”sucks” people in to sell products is that any different than what Orcam is doing to sell research? Is your site not meant to be profesional, sexy, marketable, etc. to sell yourself and your resarch to others? What’s the difference? when you say on your site…”you steered the partnership through one of the most turbelent investment enviornments in history without a single negative year.” Is that not a sexier way of saying..from 2003-2012 the market was down 1 year. If investors realized there was actually only one down year does the idea you sterred people through it lose some of it’s appeal?
    When you say you helped managed 500MM+ what does that mean? If you had 100mm in stock options on the books should you have claimed that as overseaing something you had no intention or aurthorization ot sell? Shouldn’t you quote the actual accounts you were buying and selling overseeing daily? Maybe you are..I know many don’t when they write sexy marketing pieces to promote their business. Isn’t that kind of a sexier way to portray yourself?
    Doesn’t everyone spin their business. I’m not saying they are good or bad. What I’m pointing out is you have taken the position that it is bad. That Gold is not productive. That your version of capitalism is good capatilism. That Wall St. and everyones coining of the term investment account is incorrect. And why are all these things wrong, incorrect or deceptive? Because Cullen has deemed them to be. How does one get to the correct way of doing all these things…”pay my fee and I’ll send you my research”. Sound familiar to what you have taken to fighting?
    But if managers don’t outperform the market is this material which comes from one part Wall St. the other part internet going to help those investors you say you can?
    I don’t have the answer to that. Time will tell.
    Investment account, savings account. brokerage account etc. in the end…we can debate what it is or isn’t(the SEC and Finra accept Wall St. version) but what matters to clients is what ever you want to call it and however you charge them..for free, for a fee, or commission did you make them money? On wall st. off wall st. doesn’t matter. It’s all a distraction.
    In My humble opinion.
    Wall St. is no better or worse than the millions of individuals all starting sites to take Wall St. business. I am not on wall st. I don’t care for parts of Wall St. and I know you are not against wall st. either.
    The tricky thing is you read something and you say..hey that’s not entirely true..or that’s kind of misleading..but hey it’s Prag cap..not my site. Just someones opinions being put out there. Well let me openly discuss this with cullen. Nothing against you..or you me…but we all have a definition of what is or isn’t something. You can not be the final word on that which many of us don’t see it as. How you believe it to be and tell others it is. Final Judge on all accounts. Wall St is “incorrect” Maybe maybe not. Who may not know as much as you.

  • Stephen

    I’m on the complete opposite side of this argument. In my opinion, gold provides the ultimate protection against the risk of permanent loss. It has no counter-party risk and no default risk – it’s value is derived in and of itself.

    By claiming that the value of gold could theoretically drop to zero, you are making the mistake of ignoring thousands of years worth of human behavior — usually not a sound investment approach.

    Do you feel the same way about diamonds? Humans are fickle creatures — as long as we occupy this planet, rare precious metals and commodities will be in demand and will have value (for as long as they remain rare of course).

    Gold provides the additional benefit of having a long history of monetary functionality. To ignore this historical precedent is unwise in my view.

    Owning a portion of your wealth in the form of non-financial assets that are tangible and cannot be “created” (gold, diamonds, land) seems like common sense to me.

  • Greg


    Obviously when everyone dumps an asset at the same time its price goes to zero. No one denies that. Your question is rhetorical. The question is why would everyone dump an asset at the same time? What are people looking for when they buy a particular asset? You buy an MBS because you expect it to give you an income stream (which comes from the mortgage holders paying their mortgages), you buy stock cuz you think it will earn money the next few years and increase in value. You buy gold why??? 1) If you buy it cuz you think it will replace the US$ as currency you are a fool. 2) If you buy it cuz you think it is more money like than any other modern currency, you are a fool. 3) If you buy it cuz you know there are fools out there who believe 1 and 2 and your portfolio has room to take advantage of said fools ……….. go for it.

  • Boston Larry

    Hi VII, you said: “from 2003-2012 the market was down 1 year.” Yes, but you didn’t add that the one down year wiped out all of the gains from the preceding 5 years for most investors. The market bottom in March 2009 brought you all the way back to the 2003 lows. The average buy and hold equity investor at that point had zero gain for 6 years. Presumably Cullen had a positive gain in 6 years, much greater than zero. To me, it is worth it to hear the views and insights of someone who isn’t at the mercy of the sometimes vicious ups and downs of equities on a long term buy and hold basis. Cheers.

  • Boston Larry

    There is no guarantee whatsoever as to what an ounce of gold will be worth in the future. Gold peaked in 1980 and then went down in value for the next 18 years before finally bottoming. I would not want to be a long-term holder of something that could go through an 18 year bear market without paying out any income whatsoever. The only appeal that gold has to me is at a tiny fraction of my portfolio as insurance that we go back to a 1970’s type of market. I don’t regard it as very likely, but I pay my fire insurance premiums and hold a little bit of gold.

  • Mikael Olsson

    I “believe” that MR accurately describes our current system as it is.

    But I “believe” that banks shouldn’t have all of the power that they do today!

    See what I did there? ;)

  • Mikael Olsson

    Aww did he trample on your beliefs?

  • Cullen Roche

    The only reason anyone would ever buy a Tsy bond is because it’s backed by $16T of output that can always be taxed. Why would anyone accept the debt of a nation that wasn’t supported by any output?

  • Cullen Roche

    This isn’t an MMT website. Why, after a full year of being totally independent and disagreeing vehemently with MMT, do so many people think I am an MMTer or a believer in the MMT ideas? I am shocked by all the recent MMT comments.

    This is not an MMT website. I have ZERO affiliation with MMT. I don’t speak for MMT.

  • Cullen Roche

    I guess you could make an argument for gold miners over gold since they’re actually leveraging the actual asset. Not my preferred way to allocate into productive output though….

  • Cullen Roche

    I am not the final judge on anything. All I do here is offer my opinions. Whether people believe them or follow them is totally up to them. I am not a preacher herding followers. If no one adheres to anything I write then so be it. I am not here to amass a following of sheep to bow at the altar of Cullen. I am here primarily to educate. To spread what I believe is fact. That’s all.

  • Mikael Olsson

    I hereby make a vague prediction that gold will seriously crater in the next few decades.

    Sea floor mining is coming, enabled by our current level of robotization. – 18 years away

    If I had a thick wad of money and desire to put it into metals, I would drudge through the designs of Gen4 nuclear plants; they take some pretty exotic alloys. Especially the LFTR reactor. Unfortunately I don’t have a thick wad of money. *snif* :)

    Oh and Titanium futures might look good long term unless they’ve taken off already.

  • Mikael Olsson

    Sorry, didn’t mean futures futures. Future of titanium.

  • Hans

    “Well, I don’t NO LONGER believe in MMT”

  • Hans

    Jaymaster, you know that is not true..

  • Cullen Roche

    Probably more accurate to say that MMT is more accurate than most of neoclassical economics, but we found enough problems with it that it was necessary to create a post-MMT view of the world. MMT is great. I just don’t think it’s a completely accurate view of the world even though it’s infinitely better than most textbook economics.

  • Aussie miner

    Thought I would share a story here …was sitting last week on a plane flying back from a large goldmining operation in Australian outback and got talking with a senior exec of the company sitting next to me. He told me that he is doing a review tour of large low grade operations around the world as their company’s global exploration portfolio no longer has any new high grade deposits left to consider. Apparently they are increasing having to turn their attention to find ways to make their large low grade deposits profitable. Problem is large low grade deposits all rely on high tonnages and more often than not are hosted in very hard rocks. Bottom line is most of these types of operations in Australia are very marginal as they have very high capital, maintenance and energy costs and in particular are very sensitive to energy costs. One large ball mill and ancillary equipment can cost up to half a billion dollars to procure, construct and commission in the Australian outback!

    On top of that many of the ultra-deep level gold mines in South Africa are experiencing similar cost pressures as ever deeper mining exponentially increases engineering challenges (not to mention the labour issues). Most of the majors like Barrick, AngloGold, Newmont, Newcrest etc all struggling with the same issues, increasing cash costs and declining profitability.

    Seabed mining – profitable robotic mining of vents at 2 to 3km depth?. Minuscule scale tonnages, unbelievably high cost and environmental limitations such as impacts to fisheries and on shore tailings disposal will prevent much future supply form that and banned in most western countries territorial waters anyway.

    The way I see it is that simple demand and supply (ever increasing mining and energy costs, increasing demand and declining physical resources in the ground) will ensure that price of gold goes into orbit and beyond in the coming years. Can’t foresee the same future for the gold mining stocks though, but that’s just my humble opinion.

  • Hans

    You could at least admit your former and most prominent supporter of MMT…

    There are pages after pages, if one goolges it..

  • Cullen Roche

    I never said I didn’t support MMT. MMT is a fine view of the world and it is far superior to neoclassical econ. I don’t deny that I once supported their work, but I haven’t been a proponent in over a year. We created MR because we thought MMT required further development and contained some rather glaring deficiencies on the descriptive side of things. As a result, MR has grown into a very different view of the world. It’s a post-MMT view.

  • Hans

    ” Basically, I summarized the fact that none of us are really “investing” in secondary markets. That is, when you buy stocks on an exchange you are not really an investor. You are just allocating your savings. Real investment is done on primary markets via IPOs or via private equity or through private purchases not consumed for the purpose of future production.”

    I had to stop reading after this first paragraph..This comment is junk economics and would be something your professor would teach, at the Univ of Berkeley..

    So a stock IPO is an investment, but the buyer on the exchange is not.

    Let me ax anyone, would IPO exist if their were no trading exchanges ?

  • Hans

    Thank you, Mr Roche…I will read the MR and see if I understand it and agree with part or all or none..

    MMT and some of their proponents, where, IMHO, beyond the pale..

    My favorite, from Warren’s book, that taxes are a means to regulate economic activity…

    Complements on your redesigned website…Most excellent, indeed..

  • Cullen Roche

    Thanks Hans. I am glad to help. I would recommend starting here with MR.

    Feel free to email with questions. Or use the ask cullen section. Have a good weekend.

  • Johnny Evers

    Because a) T-bond is not a claim on future output and b) T-bonds are outpacing output.
    A T-bnnd is simply a promise that you will be paid back in a depreciating asset, and, oh, you won’t be paid out in future tax receipts, you will be paid back when additional years are tacked onto the debt.
    We’ve been taught for so long that a T-bond is a ‘risk-free asset’ that accepting that treasury debt carries principal risk would blow up most investment models.

  • Cullen Roche


    Tsy’s are essentially a claim on future revenue. If you buy bonds from a corporation you are relying on their ability to pay you back out of future earnings. If the bond matures you will be paid on the dollar with interest. This subtracts from the earnings of the corporation. Buying a t-bond is a claim on future revenue. You are relying on the govt to be able to raise revenue to pay you back. How does the govt obtain revenue? They tax output. So, t-bonds are a claim on total output. The only reason people would ever buy t-bonds is if they are certain the govt can make good on this deal by being able to tax future output. This is why a currency fails during hyperinflation and output collapse. The inability to tax output means the country cannot raise revenue to pay their bondholders….

  • SS

    If you’re connecting all the dots with Cullen here this is some really amazing commentary in the comments. Great stuff Cullen. Have a good one and thanks for another educational week!

  • Cullen Roche

    Whew. Long week. I’m off to squeeze in a quick grunting session at the gym with the kiddie weights. Take care everyone.

  • Hans

    Mr Roche, your argument is very powerful and in a contractual sense it bears great weight…Your precise description would be difficult to refute, especially from a dolt like me.

    My point of view again is, that without the capital markets there could be no stock IPOs…

    Furthermore, my personal definition of investment is more basic and less rigorous; wherein surplus monies are exchanged for the rights of an instrument which is subject to gains or losses.

    And if stock buyers are not investors then what are they?

    In the purest sense, I suspect you are correct, however, without secondary markets there would be no primary one.. Please allow the plebes some crumbs…

  • Johnny Evers

    I’ve been reading this blog for months now and the impression I get from MR proponents is that actually paying down debt with tax dollars would be bad policy. The debt will be rolled over, not paid back.
    Also, remember last summer there was a report, U.S. Inc., that looked at the U.S. as a corporation, and concluded that our future liabilities (entitlements) far outweigh our future ability to raise taxes to pay those liabilities.

  • Cowpoke

    Johnny, I think that is precisely the point.
    The US (Govt) does NOT fund itself through taxes. It funds itself through “Innovation”.

    I remember as a kid in the 70’s All I heard with regards to economics was “The Arabs are buying us up” the Saudis will own us… Then in the 80’s the drum beat changed to The “Japs are buying us up” and will own us… NOW I hear The Chinese are “Buying Us Up”

    Something is is not right here and I am more inclined to think that the Fear Mongering of end f world doom and gloom they own us is a farce.

    for starters we know the US Federal Govt can with a pen seize what ever they want. So as long as foreign investors want to use their US denominated Dollars to buy US goods, real estate, companies, I think it may be fine.
    I think the US as a whole is really a Free mkt Nation and what is good about it is that regardless peoples nationality, People Vote with their “pocket book”, So YES the US is a corporation that gave the world the Model T, a Polio vaccine and an Iphone.
    That’s why we will not fail as a nation state.. so long as we can provide the safest place for people to trust that their capital will be placed in a bastion of perpetual creativity.

  • Mikael Olsson

    I cannot understand for the life of me why there is confusion about this.

  • Johnny Evers

    Cowpoke, agree. The U.S. will continue to grow and prosper, so long as we grow through innovation, hard work and freedom.
    However, what happens if we double our output and quadruple our debt?

  • Mikael Olsson

    Ahem. There are TONS of companies that bring in money through emitting new shares without being on the stock exchanges.

    Sure, without stock markets there wouldn’t be any IPOs because IPO is when you bring a company to a stock exchange for the first time. That’s kind of a given isn’t it..?

    And, yes, a company can emit new shares to the stock exchange once they are on it. But like I said, being on a stock exchange is not a requirement for raising money via emitting shares.

  • Mikael Olsson

    Also, there’s Crowdfunding, which is a type of “IPO”. I’m sure many of startups on the crowdfunding sites wouldn’t mind it if someone called them up and said “I’ll buy all the shares if you let me take a closer look at your business plans and give advice!”.

    THAT is investing.

  • Android

    I think asset/money has both an extrinsic or perceived value and an intrinsic or fundamental value. The extrinsic value can be above, equal to, or below the intrinsic value. For assets, the extrinsic value is what people think the asset is worth, and the intrinsic value is based on the asset fundamentals or productivity. For money, the intrinsic value is basically the material/commodity price; for fiat, this is essentially zero, but for gold there is some market price. For money, the extrinsic value is its acceptance as a medium of exchange. Is gold an asset or money or both or neither? (rhetorical)

    Does this make sense? Please correct me if I am wrong.

    I am not replying to you LVG. I just thought this was a good place to comment. I don’t know, I have been reading this blog for years but rarely comment, especially regarding economics.

  • hangemhi

    “what happens if we double our output and guadruple our debt”. Well, that sounds like full employment and a booming economy to me… at which time tax receipts will bring down the deficit.

    As for your other comment “I’ve been reading this blog for a long time” and “a report, U.S. Inc., that looked at the U.S. as a corporation” that just means you aren’t actually reading anything here. You’re just commenting. Otherwise you’d know your report is flawed even before it starts by even thinking the two are comparable

  • jaymaster


    Hmm. No I don’t know that’s not true.

    From my reading, Gary is saying, “Gold is infallible. Prove to me that stocks, bonds, fiat, etc are infallible.”

    Maybe I’m misinterpreting him. If so, then bad on me.

    But I’ve never seen Cullen or anyone else, and absolutely not me, who have claimed that the other forms of wealth are infallible.

    So to my way of thinking, the gold fans need to explain to the rest of us why gold is so special that it’s not fallible too.

  • DanH

    What’s so controversial here? Cullen’s comments appear totally rational and factual. He’s not even badmouthing gold. He says it’s just not the appropriate asset to design an entire portfolio around. I think that’s pretty prudent advice.

  • Cowpoke

    I really don’t think there is much worry because I think there is almost a pardon the pun “Matrix” like take on it all.
    I think the core of it is what we have seen over the last few years with US treasury Yields AND japanese for that matter.. Human beings show who they trust with where they put their MONEY. That’s the bottom line. Hell I recall a Date Line NBC episode a few years ago about a Saudi Prince Alla weed guy I think:

    Heck he was sitting there in a GIGANTIC tent and Arabs from all over were coming to him to ask for a check to buy this or build that (road, mosque, school)in their province. he would nod with a cordial and then wave to a dude that had the check book and write it up and hand it out.
    Now that is not my point but part of it. My main point is that all the while, he was preoccupied with what the US STOCK MARKET was doing at the time on a computer he had sitting beside him watching his investments. He was/is a heavy investor in the US markets and companies Like Citi bank. This struck me because all the noise ya hear about US bad evil blah blah from the Arabs, Muslims, and all but in reality, People REALLY show their colors when it comes to where they put their MONEY.. :)

  • Mikael Olsson

    The only disagreement is with people that think the government is destroying their wealth and want the gold standard back.

  • The Dork of Cork.

    You come from a branch of Keynesian thought yes ?

    I have nothing against fiat or national credit money systems Cullen , I have a problem with the post 1648 system.

    I don’t think the treasury & the CB should be symbiotic entity.

  • Andrew P

    You can buy gold because you know that Chinese and Indians love gold, and the Chinese are speculating in commodities in a very big way. Also the PBOC is buying massive amounts of gold. Gold may not be a currency to replace US dollars domestically, but it IS a currency in certain international transactions, particularly when one party is subject to US sanctions.

  • Andrew P

    Nothing is infallible. If you bought gold at the peak in the late 70s, you were losing money until recently. If someone discovers a way to do neutrino tomography of the whole planet and finds out where all the deep gold deposits are, the price of gold could drop for several centuries.

  • Johnny Evers

    Strange, but that’s the type of debt load that Japan carries and they’re certainly not booming.
    By the way, I want an MR ruling — will debt be paid back by taxes, or just rolled over?

  • jaymaster


    I don’t disagree with much of what you’ve said.

    But let me give you a real world example. One of my ancestors emigrated from Scotland to America around 1690. According to a deed we found, he bought 1200 acres near Philadelphia for the price of 2 oz gold, 6 oz silver.

    Unfortunately for me, neither the gold/silver nor the land was passed down, so I got nothin’ from it. (Except a relatively free country, so I’m not complaining!)

    Doing the math, the metal would be worth maybe $4000 today.

    The land? Somewhere between $20 million and $100 million.

    That’s over roughly a 300 year period, not 1000. Maybe things will flip in the next 600 years or so.

    Which would you rather leave to your heirs?

  • LVG

    This is a good question that I would love Cullen to answer. He’s obviously influenced by MMT to some degree. But he’s about as pro-business pro-capitalist as they come. MR has basically developed into a pro-capitalism view of the world that views the private sector and the market as the center of the monetary system. Government just “facilitates” as he says. There are some pretty Austrian views in there I believe. But there are also some Keynesian views in there. I really don’t know what MR is to be honest. It just sort of seems to be reality.

  • jaymaster


    I agree with you. Others don’t.

    And they’re short on specifics as to why, IMO.

  • kyle hipp

    Cullen, I think you clearly defined the difference between savings and investments. I think there is great importance in understanding words to a deeper level than common conversation. I appreciate your efforts looking at the often missed sides of the investment world.

    The biggest thing I liked about your breakdown in that it clearly defines what I believe should be a divide in capital gains taxes. So often politicians speak of investment income as growing jobs or even just an actual investments in a community or other area. I see a clear divide that you describe from savings and investments that the IRS both describe as investments and are taxed the same when it is clear that they are very different and I believe should be taxed different because their benefits are clearly different. Of course this also against another belief of mine that the tax code should be simplified. Oh well thanks again for all your work.

  • Andrew P

    In the Roman Empire, the metal of the coins was a monetary unit. The Aureus (gold coin) was never debased, because it was only used in international transactions. The silver coins got heavily debased, and had almost no silver left in them by the end of the empire.

  • Andrew P

    Gold is a speculation, pure and simple. It is a pure bet that the price of gold will go up, or at least not go down as much as other assets.

    Buying and developing a gold mine is an investment.

  • Eric

    Agreed hope is not a solid strategy, but understanding future demand for gold and making price expectations is not unlike investing in other assets. gold has also shown to have historical diversification effects, when aggregated in a well diversified portfolio, addresses your first requirement. “faith put” > going concern of any company on R3000.

  • Andrew P

    Corporations can’t print the currency they borrow in. The Government has the privilege of being Sovereign, which means Bernanke can print up dollars to buy treasury bonds. If he and Geithner wanted to, Bernanke could buy infinite term T-bonds at 0% interest, or Congress could delete the bonds owned by the Fed outright and delete the entries from both balance sheets. (The BOE and BOJ are openly talking about tearing up their country’s Treasury bonds that they own) The powers of a Central Banker are better than those of a near bankrupt corporation that gets a lucky chance to buy its own debt for a penny on the dollar.

  • Andrew P

    Past performance is no guarantee of future results. Betting on the eternal value of gold is betting against innovation in science and technology. New technology such as neutrino tomography, hidden sector tomography, or whatever, could make it possible to find all the deeply buried and hidden gold deposits on the planet. This could crash the price of gold in real terms for hundreds or even thousands of years. While vastly more farfetched, something like dynamic temporal duplication would allow any material object to be copied, and allow matter and energy to become fully interchangeable in all their forms. While it is true that neither of these things are in the realm of plausible technology in our lifetimes. you never know. If your bet goes beyond your lifetime to eternity (how?), the probability that the value of gold goes to near zero approaches 1.

  • Andrew P

    Or the government of Iran that can’t use dollars anymore so they exchange oil for gold and gold for food. Or just barter oil for food.

  • rp1

    I view gold as a form of insurance.

  • Cowpoke

    Andy, do you have any links to this as fact? I would LOVE to read about real time barter transactions.
    Thanks in advance..

  • Stephen

    This isn’t a Star Wars film — assuming that we live on planet earth in the year 2012, I’m willing to take the chance that gold retains the traits that have made it valuable for thousands of years — at least for the foreseeable future.

  • Johnny Evers

    The land, of course, but what gold proponents are asking is: Would you rather have the gold or some 1690 Colonial Notes issued by the Massachusetts Bay Colony (by a neat twist, the first paper money in the Americas, the year your ancestor made his purchase.)

  • Cowpoke

    Johnny??? You There? Heck I am starting to think that Cullen should revisit adding a forum that he use to have here on Prag Cap so that people could Chat/ Converse in a discussion.
    This tread posting seems to make for points and opinions getting lost in a sea of nois..

  • Johnny Evers

    I suggest he have a forum for some of this, so we can start our own threads.
    I admire him putting up with some of the give and take in here.

    I enjoy your perspective.

  • Cowpoke

    Andy, at first read, I thought you crazy, but the i recalled that they already sorta do that vis “REPO”.
    and off balance sheet accounting..

  • Scott Krisiloff


    I still think you’re selling gold short by assigning so much weight to its quasi-monetary characteristics. More than half of gold demand is for non-monetary (jewelry and electronics) use. Only about 1/3 of gold demand is household investment demand, even in this environment when investment demand is clearly unusually elevated. Seems to me based on demand numbers that the primary support for the gold price is not investment, it’s genuine consumption. The demand figures are telling you that some people think there’s lots of utility to gold even if it’s subjective. Remember beauty is in the eye of the beholder.

    Check out the numbers:

  • Tyler

    Betting against gold and its lifetime, which is older than anything else in the market, seems like a very bad bet.

  • Tyler

    Does the world’s largest military count as output?

  • Greg

    “Does the worlds largest military count as out put?”

    Of course. When you measure the number of things and the price of those things (Which is what GDP is getting at) being produced FOR the MIC its an enormous amount of output. Trillions a year. Every high tech gadget produced for the military and paid for by the US govt is output. Additionally the spending on those things ends up in the pockets of some middle and upper middle class consumers who work for the companies producing those things and that stimulates more activity as they go and demand stuff for their dollar.
    Not to mention the non military spinoffs of a lot of these technologies, I think its safe to say that the true output from military spending is unmeasurable to an exact amount but very large.

    The question of whether its productive output is another one entirely. But from its contribution to GDP, as a pure measure of activity, it IS productive.

  • Ryan Melvey

    Gold is not an investment. Gold is the anti-investment. Gold makes no promises of interest, dividends, retained earnings, or buy backs. Because it makes no promises, there is no counter-party risk.

    It is simply a very liquid homogeneous real asset. When you hold gold, you do not have wealth in the financial system. When times are good, almost any asset in the financial system looks better compared to gold because promises are being fulfilled. However, when promises are being broken gold looks relatively more attractive, because it never promised you anything in the first place.

    I like this aspect of gold. It is not an investment; it is the anti investment. It is what people buy when nothing else looks attractive. It is the ultimate reciprocal. So, when I attempt to construct a broadly diversified portfolio, gold plays a role in that.

  • zmt63

    Please, please, please Gary…. we all relish the idea of losing you, not so much as a reader, as I couldn’t care less, but certainly as a commenter. Your comments are redundant and a wst of my time.

  • Lucas

    What would happen to the price of gold if the government began confiscating it like they did in 1934?

  • Bob

    Nice cherry picking. Now, all u have to do is find the next Apple. Good luck!

  • Greg

    Hey VII

    We dont all get our own definition of investment as its used by economists. We need more investment in our economy, which is a form of spending NOT saving. Saving is the opposite spending.

    The main problem with Wall St definition of investment is that it makes people think that by giving more of their money to Wall St we will relieve our economic problems.

    The economists definition of investment means adding to the stock of existing assets via increased production and not just shuffling around our existing assets. We need to ADD to our production in order to get more people employed and adding to overall incomes.

    As Cullen explains so well, what most of us are doing is simply allocating saving to various vehicles to save. Investment leads to more saving, that is the correct direction of the S=I identity.

    Its not a matter of Cullen being a final judge its making sure we are talking about the same thing

  • Greg

    Great example Andrew but its also important that the buying of that gold mine is not just replacing a silver mine.

    Investment involves adding to the total stock not just replacing.

    Its like I tell people who tell me Wal Mart will add jobs when they come to town. Thats only true if the what people are spending at WalMart WASNT being spent somewhere else previously. Otherwise they are just reshaping how people buy the stuff Wal Mart sells. IN most cases all that happens is WalMart causes someone else to lay people off as their sales drop.

    If everyone gets more incomes and can spend the additional income at WalMart then there is a net add.

  • Greg

    I like that definition Ryan.

    But its also true that most of the time times are good. In general people are able to meet the obligations they make. Default rates are low overall.

    I have nothing against gold, I just have a thing against folks who earnestly believe it would magically solve our worlds financial issues. We had gold backed currencies for years and we did NOT have any more financial stability then. Gold doesnt make people more responsible………….. thats a pipe dream.

  • Hans

    Sorry, Jaymaster, I must have misunderstood your reply, as Andrew P, points and logic dictates – nothing is infallible…

    Sorry about the confusion I cause!

  • Hans

    Boston Larry, you are incorrect..Yes, Au NEVER had a correction in which all of its gains where wiped out.

    There was not even one declining calendar year for Au, since 2001 up to now…

    Please go to and inform yourselves…

  • Hans

    Greg, then what do you call it when you purchase stocks?

    So when you buy rental property (used) then according to your definition it is not an investment, because it is not new construction ?

    Please explain!

    Textbook theory does not always translate to reality…

  • Hans

    AP, if no one buys their production, the mine cedes to exist…You can not have the one without the other..

  • Hans

    Cowpoke, post-of-the-day…

    Whole heartily agree with your thoughts..

    Mr Roche, please bring back the post your own topic forum..

  • Hans

    Thank you, Mr Roche…I will attempt to digest the material you recommended..

  • Hans

    Stephen brilliantly stated! People should ask, what happen to our script once we left the gold standard.?

  • Greg

    Hey Hans

    As Cullen said, if you invest in an IPO, some of that IS investment. Its money the company can use to expand operations, but part of that money just pays the initial investors too so not really investment. But if I buy your 1000 shares of IBM, via an exchange of course, I am not making an investment, Im switching my dollar balances to you and “saving in IBM stock” now. Thats all.

    Yes buying a rental property is NOT investment as economists use the term. It is NOT adding to existing stock of assets or creating new production.

  • Hans

    Thank you, Mr Roche, for your extended comments..
    Superbly put, however, definitions often have more meaning than one.

    When I enter the queue and purchase existing shares from stockholders, I become the original investor by holding the certificate, even though no new monies where introduced.

    This definition which is restricted to only “new capital” in order to be called investments is IMHO, much too limited..

    Furthermore, do not all investment carry elements of risk, whether primary or secondary??

    For you or anyone else, when I purchase on the secondary market, what is that action called ??

    When this theory is used by the principal in terms of financing operations I concur…

  • Hans

    Now that is a good investment in your health!

    Do not strain yourself, because we need you back on Monday..

    Actually, as you probably already know, incorporating weight lifting in an exercise program is very prudent..

  • Hans

    Mr Melvey, you can rent out your gold and earn a small return.

  • Hans

    Mr Olsson, there is a definition for financing capital and likewise a definition when people (can not use the word investor) buy existing assets…

    Your broker is not allowed to use the word investment, but rather positions, stocks, or capital…

    I am sorry, but for most people investments consist of taking extra monies and purchasing an asset which entrails monetary risk..

    Capital investments
    Personal investments – each to their own

  • Hans

    Yes, Greg, I agree with your post…

    “Yes buying a rental property is NOT investment as economists use the term”

    I will buy that, Greg, econospeak…

  • Cullen Roche

    Hans, I am being very technical here so bear with me. There’s a specific difference between the saver and investor. The investor allows future output to increase through a direct seeding of capital. The securities are just a record of the value of this output. They have no bearing on whether the company actually operates or not. What you trade those securities at on an exchange has no bearing on the actual operations of the company. If, however, the company comes out and does a secondary offering then that record of value provides the company with an idea of what their capital is worth and allows them to raise new capital from new investors (if necessary). These new shareholders have invested in the company. But once they sell the shares they are selling to people who are allocating their savings. The new buyers are not the investors. They are savers.

  • Ryan Melvey

    Mr. Hans,

    That is true, but one of the strong diversification aspects of gold is that it has no counterparty risk. By leasing it out I have introduced default risk.


    I don’t like gold standards. They have serious weaknesses, namely constricting fiscal policy in a deflationary depression. However, policy prescriptions have nothing to do with managing “savings” (i like that) portfolio. As part of stock/bond portfolio, gold offers great diversification. I don’t need a certain ideology to recognize that and reap the benefits from it.

  • JimmyC

    Darn, I didn’t realize it wasn’t an “investment” when I bought a bunch in Dec 2003. The meanings of words can be so elusive…

  • Cullen Roche

    You bought an inflation hedge. And it’s worked out well. The words aren’t really elusive at all. Just know what you’re getting involved in when you buy an asset….That’s what matters.

  • DanH

    Most commodities don’t even protect you from inflation. And they definitely can’t protect you from permanent loss since they are consumed entirely. Buying a stock of corn does not protect you from purchasing power loss or permanent loss. Buying a company that farms corn might protect you from both.

    Gold is not that different except for the belief that it protects against inflation. I think Cullen’s reference to a “faith put” is right. If you look at gold versus the CRB index there is about a 60% differential over the last 20 years. That performance can only be attributed to one thing – faith in gold as protection against fiat money.

  • Conscience of a Conservative

    If one believes the return on equity or fixed income won’t maintain purchasing power after inflation, then gold makes sense. When one looks at negative interest rates in the fixed income sector , stocks that are at all time highs on a Schiller CAPE basis then the argument for some allocation into Gold of say 5-10%

    Saying Gold is not an investment strikes me as a difference without a distinction. I could choose to keep my money in cash, stocks, bonds, real estate, etc, and if the goal is say retirement in 10-20,30 years the only important question is which allocation will protect my purchasing power the most.

  • whatisgoingon

    Cullen how would you classify some short term treasuries that have negative yields? They seem to be the anti-thesis of gold that prevent against permanent loss but struggle to protect purchasing power.

  • krb

    No quarrel from me with what you’re saying….but Cullen was comparing gold to equities, you’re comparing to land…..I would make the same of about land in a comparison with equities that I did with gold. krb

  • Fatty McFat

    “anti-investment” you mean it’s a hedge.

  • Nils

    Those notes would probably be worth more than $4000, too…

  • JasonH

    I agree that the US system is market-based & outsourced to private banks w/ Federal Reserve as the middle-man.. just fyi, MMR is still written in some of your papers/webpages on ‘Educational’ & ‘Recommended Readings’

  • Cullen Roche

    Yeah, I guess I can’t really get upset at people calling it MMR when the name hasn’t been updated in a lot of early content! Thanks.

  • Ryan Melvey

    Yes of course. I simply mean that when someone says that gold isn’t an “investment” I totally agree with them. I embrace that it isn’t an investment. Sometimes being an investor is painful; having part of your portfolio outside of the investment universe can be beneficial.

  • asha101

    The term “producing” is misleading. Equities don’t produce. They just convert. Equities go through a process of injecting fiat money into human activities and then collect it back as the result of the process.

    If we use platinum as the exchange currency, equities will fail miserably. Bonds will have similar fate. It has nothing to do with human ingenuity to “produce”. did not die because it can’t produce or invent. It died because the human activity process it was involved did not generate net positive fiat money. It’s all about fiat money getting inflated over long run, and resulted in equities growing in value in average.

    Equities are like investing in a group of golf players to compete for the prize pool. Whether the overall skill of the players will be improved over the long run has nothing to do with your return. If you invest in a single player, it’s just a bet on that player. If you invest in everyone, it’s a bet on the overall pool size. Gold is simply a bet over how people in the future will set the exchange rate between the prize pool and gold. The probability of people losing interest in gold is the same as the probability of people gaining more interest in gold. The skill of the golf players has no direct impact on that bet.

  • Invest Gold

    When you hold gold, you do not have wealth in the financial system. When times are good, almost any asset in the financial system looks better compared to gold because promises are being fulfilled.

  • Manuel Blay

    Good article. Krugman said that gold performs well when there is no growth in equities. So rather than focusing on the alleged “inflation hedge,” hedge”, Krugman makes clear that gold performs well “by default,” when no attractive investment opportunities are to be found elsewhere.

    Technically, gold is setting up for a primary bear market signal. It is still in a primary bull market, but if the 11/02/2012 lows are violated a bear market would be signaled for gold and silver. Here you have the relevant chart and comments thereto:

  • bart

    Gold, on the other hand is anathema.

    Oil is an investment (or saving if one prefers) and is productive, etc. Gold is very highly correlated with oil and has been for many decades, and has also been way less volatile than oil over the same decades.
    Gold is still anathema… something really odd there, especially given “Protect against the risk of purchasing power loss.”.

    And yes, gold produces no cash flow. In order to be consistent, are all stocks that don’t produce dividends also at least partly anathema?

    “two primary purposes:

    1. Protect against the risk of permanent loss.

    2. Protect against the risk of purchasing power loss.”

    What happened to profit as the real #1? Without actual profit, neither #1 or #2 matter at all. Profit is the sine qua non.

  • bart

    “They’re the ones who argue that gold is infallible, right?”

    Gold bulls don’t feel that way.

    Always using the gold ‘bugs’ term is like saying that dot com bugs argue that dot coms are infallible and we know how that turned out. And it’s also spinning the actual facts.

  • bart

    Yes, I have lots of confidence in the “faith put” since it directly translates to the ‘Greenspan put’ and the ‘Bernanke put’ in the money creation area.

    Faith also means “A set of principles or beliefs.” (based on what banks do during hard asset cycles)

    It also means “Confident belief in the truth, value, or trustworthiness of a person, an idea, or a thing.” Gold always does very well during a hard asset cycle when too much money is created.

  • bart

    What would happen to the price of gold if the IMF etc. decided to make gold a portion of the value of the SDR in order to induce more confidence in the international monetary system? Or if China made the yuan partially gold backed.

    And by the way, gold lost zero value when FDR did the confiscation boogie.

  • bart

    Calling it cherry picking doesn’t at all change the incontrovertible fact that he made huge piles of profit.

  • bart

    “Gold is a speculation, pure and simple.”

    As is buying any stock, bond, etc.

  • bart

    “There is no guarantee whatsoever as to what an ounce of gold will be worth in the future.”

    Same with virtually any stock, bond, etc.

  • bart

    “what happens if we double our output and guadruple our debt”

    Read Rinehart & Rogoff’s historical research papers.

    Sometimes it is actually different this time, when one focuses too much on the short term and ignores the full lessons of history.

  • bart
  • bart

    Peak cheap gold, eh? -g-

  • bart

    I hereby make a vague prediction that stocks and bonds will seriously crater in the next few decades.

  • Hans

    Thanks Bart, that is one heck of an ugly chart…