Richard Russell on the Advantages of Gold
Richard Russell has some interesting thoughts on gold that most of the gold lovers out there will enjoy. Basically, gold is a fantastic asset class for many reasons. I don’t entirely disagree, but I’ve already made my peace on gold summarizing my stance as such:
1) Gold will never work as a global currency – single currencies don’t work without government intervention (which defeats the purpose of the gold as currency argument). See Europe.
2) Gold IS money. Anything so broadly accepted as a medium of exchange is money. End of story.
3) Gold should never represent a substantial portion of one’s investment portfolio (over 5%), though this does not mean it has NO place in a portfolio. I fall along the lines of Howard Marks and Buffett to some degree here – any asset that doesn’t generate cash-flows is hard to value and nearly impossible to manage risk around. But an investment portfolio should not only contain growth vehicles. At times, it should contain assets that negatively correlate and help to reduce overall portfolio risk. Gold fits this story given the right environment (e.g., as a negative real interest rate environment has proven).
Russell has a bit of a different view and I can only assume that he would agree with point 2 of mine and reject points 1 and 3 (via King World News):
“Stocks can declare dividends, but they can omit their dividends during hard times. Furthermore, stocks can go broke. But gold represents indestructible wealth. Gold rises in terms of fiat money, and gold declines in terms of fiat money.
Gold possesses some properties that are beyond the scope of other investments. Gold can’t go broke, because gold does not derive its purchasing power from the edict or control of any sovereign power or central bank. Gold has no counter-parties. Gold is tangible and is accepted everywhere — in good times or bad. Gold exists outside the world’s banking system. Unlike fiat money, gold is wealth on its own.
It’s tangible and not the fantasy-creation of central bankers. Gold does not need a sponsor or the acceptance of an expert (such as pricing a Picasso painting), because all gold is intrinsically the same. Gold does not tarnish nor does it degenerate — the gold in your watch may be the same gold that Cleopatra wore around her neck.
The supply of gold, unlike paper money, is limited. Alchemists have tried for centuries to turn other metals into gold — but have never succeeded. Gold is a beautiful metal on its own and the lust for gold seems to be built into the DNA of mankind. If you own ten thousand ounces of gold, you can say that you will ALWAYS be wealthy.”
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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58 Comments
Fundamentally gold bugs have “faith” in gold similar to the “faith” currency users have in their domestic currency. Neither of these faith are “rational”
Gold is supported far more by history than by faith. It is also about to become Tier 1 Capital for the banks.
EVERY fiat currency ever devised has collapsed eventually, to nothingness.
Gold is something. The best thing to hold as pure wealth, as pure money.
Gold is very likely to fall because we are entering a period of growing oil production
every time this has happened in the past gold has fallen substantially and only started to rise again when oil production started to lag demand
p
Statements like this always crack me up: “Gold IS money. Anything so broadly accepted as a medium of exchange is money. End of story.”
I can’t even begin to tell you how often the two phrases “end of story” and “gold is money” find themselves together. Why exactly is it always “end of story” with “gold is money”? Is it because people who say this have absolutely nothing to back it up?
And Why does Mr. Russell say, “broadly accepted as a medium of exchange”? Where is this guy’s point of reference where he’s seeing gold used as a medium of exchange?
I don’t get that either it seems highly impractical (scrape off some gold dust of your gold bar to pay for your coffee?), but I probably don’t operate in the spheres where you can use an ounce of gold like I would use a 5 EUR bill
Bob
That’s Cullen’s position you’re addressing, not Russell’s. Just so you know who you’re arguing with.
Between Nations, gold is always a medium of exchange. To buy your coffee, not so much.
Well said, Bob. I agree. “Gold is money” and “End of story” — hilarious…
Those three points above are mine, not Russell’s. Personally, I don’t see how anyone can refute the idea that gold is money. As Minsky once said, anything can be money, the difficulty is in getting others to accept it. As far as “money things” go, gold is a better medium of exchange than most other things. Granted, it’s not a great medium of exchange and the moneyness of gold is inferior to say, fiat, but that doesn’t mean it’s not money.
From my perspective, if you can’t sell gold at the same price at which it was purchased, then it’s not a good medium of exchange. Whereas a dollar is a dollar is a dollar, at least at the time it’s acquired.
For example, if today I decided to buy some gold I’d have to pay a premium to spot. Could you imagine if people could only buy 20 dollars for 21 dollars?
The value of a dollar changes every day relative to other assets.
True, but I know I can always get a dollar for a dollar. I don’t think the same is true for gold, but maybe I’m wrong.
Most things are denominated in dollars so their value changes relative to the dollar, but that doesn’t mean a dollar is always a dollar. Your purchasing power is certain to change over time. Don’t confuse nominal values with real values.
It’s true that a dollar today is not the same as a dollar tomorrow, but my point is that a dollar today is a dollar today. However, an ounce of gold today is not worth an ounce of gold today. I cannot buy and then sell an ounce for an ounce. I have to pay a premium to buy and a discount to sell.
You need to compare an equivalent value. You would need to try and exchange about $1,600, and outside of a bank you would find it quite difficult. The case is similar for gold. If you went to a gold dealer you would probably have to pay a small percentage to exchange an ounce of gold for an ounce of gold.
A single dollar is almost worthless, but even that, if you went up to somebody on the street and said “I’ll give you this dollar in my pocket for that dollar in your pocket” they would probably reject the offer.
The key thing to understand is that you can, in almost any city in the world, exchange an ounce of gold for the equivalent value in the local currency, and that value is pretty much the same everywhere you go anywhere in the world.
That is why gold is one of the best moneys: it holds it’s value through time and space.
Where is this guy’s point of reference where he’s seeing gold used as a medium of exchange?
His reference? Reality. It IS used as a medium of exchange.
We’ll see how much of a store of value it is when u buy it at 1600 and it falls to 1000, or even back to 600. Of course the fall will be in fiat currency, so Im’ guessing it wont matter eh.
Uh Uh Uh always the same ultra polarized fideistic attitude: or gold is pure heaven or is pure evil. Crazy. I’m mostly with Cullen except that, if you are really wealthy (that is over 1 million in cash or equivalent) 5% should be increased to 10%. It’s a real insurance in that case and if gold goes to 1300 it will not change your condition of a wealty person. Gold is also a speculative affair and a relative small market. So a good trader should increase it to an arbitrary high percentage or short it if the conditions suggest to do it.
Cullen,
Regarding 1 – gold may work as a global currency, although I think it is not likely. Comparison with EURO is not correct, as EURO is clear and pure fiat. Whatever rules you attach to fiat, there always be a free-rider problem as people know it can be “printed”/expanded through “credit” indefinitely. We will always have Greeces with EURO. Gold has other disadvantages, but it is somewhat different from EURO.
The Roman Empire was losing all its gold because China sold them silk in exchange for gold, but never spent their gold on imports. The main disadvantage of gold is when one Nation simply accumulates gold instead of trading it.
Have not heard about that… Sounds like a disadvantage of gold. Yet, on the other side, who forced them to buy silk?
With RomURO, it would have been much easier – the Empire would have just printed them, and paid for the silk to perpetuity. And in the end, the chinese would have got a lot of stuff to make some recycled paper for Confucius books!!!
When the British were importing so much tea from China and there was nothing the Chinese wanted from Britain, the Brits were running out of Gold and so resorted to selling cocaine to the Chinese. The Chinese government objected and so a small war with China forced China to back down.
You could say Dope is equal to gold in international trade as everyone seems to want it despite the laws.
Heh, dope might be even better, the only problem, it gets consumed quite fast….
Regarding modern China trade, the more i think about it, the more convinced I get it is essentially all the same – we buy something from China, China does not buy anything from us (well, on balance). Only this time the terms for us are much much better – instead of valuable gold, or even more valuable dope, we give them a bunch of waisted paper and electromagnetic impulses. Oh God, I wish I could do the same on personal level!
This is just a special case of the problem of trade imbalances. Asia (including India), has historically been a precious metals ‘sink’ – although New World gold and silver temporarily eased the problem for Europe.
The Portuguese were able to easily take over the peaceful, thriving Indian Ocean trade, because nobody bothered to arm their ships. And they, followed by the Dutch and British had to continue to dominate trade with the Orient through military power because. until after the industrial revolution, they produced little the East wanted. As late as the 1830′s, the British fought the ‘Opium Wars’ to force the Chinese government essentially to allow opium rather than silver to counterbalance imprts of tea.
(Note that the Chinese would have had no reason to accept payment for silk in a fiat Roman currency, unless the Romans produced something they wanted to buy with it.)
What a lousy argument – was he saying this in 2002 when gold was @ $250 / ounce?
Gold IS broke – it has no asset base backing it with real cash flow!
It is the quintessential speculative asset – its value is not in the least but forecastable, like say a PG, MO, MCD, etc – the entirety of its value is faith based.
In fact, gold actually goes down most of the time, in effect, the antithesis to stocks – since the mid 80s gold has been up only 35% of all trading days!! Compare this to stocks which are up 56% of the time.
Gold is like the way Paul Tudor describes trading in general – over time you’ll lose….
Just another guy in this industry telling us how great yesterday’s story is instead of telling us what tomorrows will be.
Sir,
This is the best argument against gold I have ever heard – “Gold IS broke – it has no asset base backing it with real cash flow”! You should have also added “… and no industrial use” to put the last nail in the evil metal coffine….
You are wrong though – you can lend gold to a bullion bank a get a return on it. Please, go and study the subject some more.
Gold is silly. Not saying it hasn’t been hugely tradeable at points in time but in the aggregate nobody builds wealth in metals over time…
Wealth is built by buying companies that can consistently take one unit of input X and sell it to an ever growing number of people willing to pay X+Y.
If I buy a unit of gold today at X, on its own, I have one unit of gold tomorrow, still worth X, unless of course somebody, for no reason other than speculation on their part, believes it is arbitrarily worth X+Y.
I’d rather buy LULU, which I used to cover on the sell-side, who has convinced an ever growing number of people to buy yoga/fitness gear that they buy, assemble and sell at a whopping 60-70% gross margins LOL!!
Look, if i buy 1 EURO for X USD today and sell it for X+1 USD tomorrow, have I made any money?
The statement above says “gold is money”, it does not say “gold is an equity in a company”. Let’s compare apples to apples.
Gold is not money.
CR is wrong.
Andrew P said it best – if you show up at Starbucks with a bar of gold to buy your Venti they will laugh. If you show up with a dead president they will smile.
When I can start buying a McDs Big Mac with my gold-backed debit card lets have this convo but until then it’s all moot friemdo.
Again – just because a few academics have some theory that “gold is ,only” doesn’t mean reality is the same.
History says if I buy gold today I will be down on it in time and the opposite if I buy Colgate, Philip Morris, McDs, Nike, etc.
You buy coffee and big macs with currency, not money. There is a difference between currency and money, although they can be represented by the same thing, as is the case with the U.S. dollar today, it is both currency and money.
Currency is generally for spending and smaller transactions while money is generally for saving and larger transactions. A good money should hold it’s value over time, while currency does not need to as it is intended to move quickly.
Gold is a good money, but it’s a bad currency.
Good explanation, thank you.
You’re being too extreme. Almost anything can be money. My underwear can be money. The trick is in getting others to accept it as a medium of exchange, a store of value or a unit of account. I agree that the moneyness of gold is not terribly high, ie, it’s not good for transactions (decent store of value and not a unit of account in most nations). But that doesn’t mean it’s not money. And the moneyness of gold is infinitely higher than the moneyness of my underwear.
All fair points as were Patrick’s – there is definitely some nuance to the discussion.
I like how you practiced here what you seem to preach on trading: ‘be prepared to adjust your position’.
Well, yes and no. The thing you use as a medium of exchange/storage of value should have very limited use outside of this, and should not decay for considerable amount of time. Gold is perfect for this, fiat currency is also good, but less so.
As to your underware, lets be honest – it does not classify as money. However, it would do as collectible, or a piece of art (maybe quite valuable in the end…)
I’d say a collectible is often a form of money. And no, my underwear is not a collectible. The only thing collecting my underwear is garbage cans.
cullen – i heard there is a huge network of MMT-disciple young ladies over on the yahoo message boards who would love to get their hands on your underwear…
(wow – I think that attempt at a single humorous sentence may have contained 4 mutually exclusive groups…)
Those ladies will be disappointed to know that a bunch of us have rejected some of the core MMT ideas in preference to our own work, MMR. http://monetaryrealism.com/
So, in the 1930s gold was $30 odd an ounce. Not done bad has it over a decent time frame?
Remember this comment for a few years, it will not bring you comfort when you need it, but you will think ‘Shit, wish I’d at least investigated’:
Gold will eventually recapitalise the world, at levels north of $50,000 an ounce (in today’s money), and it will stay up there from then on. Most paper-type investments/fiat currencies will simply collapse. If you are curious rather than closed-minded you could save yourself a lot of future stress by delving into Fofoa’s blog archive. I suspect you will not, but you will remember my friendly tip in a few year’s time!
Good luck.
Is gold money? Sure. Money is just a medium of exchange. Is linen/cotten money? Sure. You can break down gold into coins just like you can break down linen/cotten into bills. Problem with precious metal coins is that people can and will hoard them.
I view gold as a form of homeowner’s insurance policy. Sure, you pay for coverage that you are likely never going to use but if a category 5 hurricane strikes or a massive tornado, then a little insurance doesn’t hurt. I agree with Cullen that buying it monthly is a good way to obtain this “insurance policy”. Hard to jump in at one price point as it is very difficult to price.
Gold has outperformed stocks the past 10 years and lots of people missed the boat. When I miss an investment story, I don’t get mad at the people who got it right.
We’ll see how it does going forward, but when you look at the trillions of dollars — and euros — we need to print to fund government, I think that if you’re serious about money management you have to consider owning it.
As you (should) know…
“the central banks’ central bank – the Bank of International Settlements (BIS) – is considering reclassifying gold as risk-free assets as part of the Basel III framework…”
there are plenty of comments about this on the net. So if for the BIS gold is money than GOLD IS MONEY.
If you own ten thousand ounces of gold, you can say that you will ALWAYS be wealthy.
Not once we start mining asteroids.
http://www.bbc.co.uk/news/science-environment-17835607
I would put it a bit differently.
Gold is only one form of money. When there’s absolutely no gold available then people will use another form of money (=medium of exchange). Some cultures in the Pacific use seashells. Roman soldiers received their payments in the form of an amount of salt. (that’s where the word salary is derived from). So, even gold is a fiat currency.
I disagree that gold is fiat currency, fiat currency is by government decree, whereas gold is almost always money by mutual consent of the society when it is available.
When gold is available and there are no other constraints, it almost invariably becomes money. There is something in human society that makes gold the perfect fit for money as we’ve needed it over the last few thousand years. Only when it is unavailable, or the government puts restraints on it, does gold not function as money.
Money is always fiat.
http://www.inflateordie.com/files/How%20Do%20Empires%20Die%2006-17-2012.pdf
And this not what one C.R. likes, right ?
No money is not always fiat, although most in the modern world is fiat, but still not all.
However, gold has some properties that make it an outstanding/superior medium of exchange. That’s why a lot folks love it so much.
Money can have three uses:
Method of exchange
Unit of account
Store of value
Gold could do all three, however it is best left to just do the ‘store of value’ role. Fiat does the other two very well, but sucks as a store of value.
The ECB and other central banks hold thousands of tonnes of gold, as a store of value, and they mark it to value every quarter. Gold is being demonetised currently, ready to fulfill its true destiny as the wealth reserve par excellence.
Save in gold, spend your fiat, simple!
It’s been my personal opinion that the September 2011 high in gold constituted an important top in gold but it was unlikely to be the final top. After reading the comments in this post I feel considerably more confidant in that opinion.
“gold has no counterparties” = FALSE
It strikes me that many of the contributors to this post are not following what is going on in the world today. Central banks hold gold and many are accumulating it. Now why on earth would they do that? Because it isn’t worth anything….?
The entire premise on which many argue against gold is true in some circumstances and not in others. Why people have this type of discussion baffles me. It can only be that you do not consider gold to have value under any circumstances, which the last 10 years have proven you completely wrong.
Having a cash flow in a fiat currency, which is losing its value and is expected to continue losing its value is not a sound basis for an investment.
I wouldn’t look at CB activity to indicate anything about the value, although I do agree that it helps the “moneyness” argument. If we remember, CBs were selling at the bottom of the gold market, so it is very possible that their actions do not hint at what gold is worth.
Re: the claim that gold has always been ‘money’.
The New World had advanced civilizations in Meso and South America, with highly skilled ornamental goldsmiths, and cultures with extensive trading networks in NA; but I am not aware of any evidence that gold was used as money there. (Supposedly, when the Conquistadors demanded all the gold, the native response was ‘Thank goodness they don’t know about jade’.)
Can anyone confirm this, or elucidate on ‘money’ in preColumbian America?
But the CBs still hold gold and some are buying. Gold is likely to become an fully authorized recognition of capital for banks.
How’s the reading going Cullen? I hope you will persevere.