Megan McArdle notes on gold fever:
I’m going to dispute the notion that gold is a good hedge against the apocalypse. Â In the event that the US economy melts down so far that buying gold was a good alternative to holding US dollars, then buying canned goods, ammunition, and medical supplies was an even better alternative to gold. Â The only scenario I can think of in which it makes sense to stockpile a lot of gold is one where you and your household goods are unexpectedly teleported into the sixteenth century. Â If you worry a lot about this, then by all means, stockpile gold. Â But you should also probably take the precaution of stockpiling antibiotics and how-to books on dentistry.
I currently have no gold holdings, largely because I’ve been worried about it being a bubble. Of course, I’ve been thinking that since 2005, which had I invested all my money in gold then, I would have doubled it. But I’m wary of buying at the top of a bubble. I would never have the courage to hold gold long term.
I’ve never understood the libertarian fascination with the gold standard. Currently our currency is worth money because the government says it is. Libertarians have long wanted money backed up by gold. But what backs up gold? It’s never seemed to be a good idea to have your money supply dependent on something you have to mine from the ground.
Gold may be a good hedge against inflation, perhaps, but my inclination will be to pump my current cash reserves into the primary asset that is my house if inflation takes off. I need a new kitchen, a new shower, a good bit of exterior work, new driveway, and a once over of the yard by a  decent landscaper.
As for preparing for total meltdown? Well, I think I have enough guns and ammunition available for barter to take care of myself pretty well.
Gold is good for at least one thing. I keeps the Fed from just printing money. If you have to back dollars with something they can’t just dump billions of new dollars into the market and devalue the existing dollars.
I have owned gold since 03, and am a Libertarian so I can comment on this. The point of the Gold standard is it restrains the Government. Inflation is a hidden tax on the people that the Government uses to grow much larger than would otherwise be possible. Consider the 2 wars, if we were on a Gold Standard the Federal Reserve would not be able to monetize the debt as they twice now, and countries like China which hold a large amount of debt could sell the debt and demand delivery of Gold from the treasury. Obviously the Government can’t lose all the backing of the currency so they need to stop spending all the money. The reason Gold or Silver are chosen is it is what the Market Chose as money. Since when the government didn’t control the currency that is what people chose on their own to trade in (when they moved on from direct barter).
In a total collapse you first want food and ammo and medical supplies, but when society started to rebuild itself Gold and Silver present the obvious trading good since you may have .44 mag ammo that you want to barter, but I need 9mm, we can trade in silver or gold and then I take that silver or gold and trade it with someone who has 9mm.
If you have ever held gold or silver you can see it is easy to identify what real gold and silver coins feel like, so there is some amount of protection from fakes there, additionally it is divisible so you know that 1 oz of silver is = to anotehr 1 oz of silver. Vs something say like Diamonds where it isn’t just weight that determines value (color, clarity, etc).
So most libertarians would actually prefer a market based currency that the market chooses rather than a fiat currency which the government forces on us (and can devalue at will).
I’m not going to preach about returning to the gold standard, because I’m nowhere near educated enough to assess all the fiddly details that would be involved (Ian Argent had a post up recently about the simple difficulty of adjusting to the finite amount of gold and silver physically available, which had never occurred to me). But there’s one thing I can comment on:
Currently our currency is worth money because the government says it is. Libertarians have long wanted money backed up by gold. But what backs up gold?
Scarcity. Which is a hell of a lot more reliable as a basis of value than promises are. There are definitely issues with using precious metals directly as currency, not least of which is the day-to-day fluctuations in their value. But, in the absence of other serious problems, is that fluctuation better than the constant, engineered downward trend in value that we currently have with fiat currency? I’m very tempted to say it is.
The main problem with a gold standard that I can see is that it would really suck for mortgage holders. You mortgage a house for $100k, and steady deflation over the term of the loan makes it worth only $20k over a period of years. During that time, your nominal wages decline as the value of money appreciates, but the terms of the loan remain the same.
I don’t buy anything I hear people hawking or touting on the radio, it’s like buying commemorative plates or something from “as seen on TV” or even Lilian Vernon… I just can’t.
I make a poor advertising subject.
The problem is, by restraining the government by limiting the money supply, you’re also going to restrain the greater economy right along with it.
The philosophical basis of the gold standard, from my point of view, is similar to the philosophical basis of my opposition to government medicine: yes, limiting government will mean that some things go wrong. yes, it means there will be some disasters we can’t respond to and some opportunities we can’t take advantage of. But in general, there’s more to be lost by empowering government.
I’d rather have periodic problems that could have been fixed by a money-printing government than the long, steady decline and spectacular inflation bombs that come with government control of the supply of money.
I don’t know, really, whether you can get government out of the money business completely. It could be argued that business cycles have gotten far less severe since we went off the gold standard, in which case a manageable amount of inflation may be preferable to cycles of inflation and deflation, caused by a more fixed money supply.
It’s worth pointing out that a lot of folks who “own gold” actually own a certificate saying they own gold that is stored somewhere else. Perfectly fine for stock in Apple, or a gold mine, but its certainly not end-of-the-world currency if you don’t actually own it.
There is an article somewhere by a guy who lived through a South American country falling apart. He strongly recommended buying cheap worthless gold-like necklaces and rings. The axiom ‘gold is worth what somebody will pay for it’ makes stockpiling 24 carat gold stupid. If you get the same number of bullets for a brick of gold as for a pretty bauble, the bauble was a better investment.
Read my article Elmo linked to for the biggest negative effect of switching to gold now… there’s other reasons as well
As for rarity/scarcity: bad argument. I will have more on this shortly, but for now, think about what would have happened if we were on the diamond standard…
I’m not going to touch on the gold standard. But as an investment I don’t like gold at all.
As an inflation hedge (which is what it is better characterized as), gold doesn’t do well either. Much of this has to do with taxes. First, postulate that gold moves in proportion with inflation. Also assume we have hyperinflation. Great! You’ve preserved purchasing power because 1 oz of gold will still buy you the same amount of goods and services.
The problem is that your gold, when you sell it, will be subject to absurdly high tax rates. Gold is considered a collectible and taxed at 28% rather than the usual, much lower, capital gains taxes.
The other downside of gold is that it is expensive to store (i.e. there are significant investment costs). I often can’t control the payoff of a financial vehicle, but I can control its tax efficiency and the expenses, and gold flunks miserably on both of those fronts.
Gold is not an investment; it’s an inflation hedge. An investment actually should get you ahead of inflation, not just hold steady with it.
There are strong arguments in favor of a gold standard, largely because it discourages governmental inflation of the money supply. But one of the problems of postbellum America was that the gold standard meant that we suffered a continuous decline in prices because the economy grew faster than the gold supply. Because it was an imperceptible decline, and no one was properly tracking it, it caused all sorts of distortions and economic problems.
Seriously, if are expecting end of civilization events, gold is less valuable than medical supplies, food, and ammunition. It is best if the gold you do have is in small chunks. I talked to someone once who lived in Germany at the end of World War II. He told me that his wife’s gold jewelery was more useful as a medium of exchange than bars of gold, for the same reason that a $500 bill isn’t useful for getting a haircut. (I was too polite to ask how he ended up with gold bars at the end of the war.)
I’m not convinced that our business cycles have become less severe since we left the gold standard. The Panic of 1819, for example, was a consequence of the 2nd Bank of the United States making credit too easy to get, causing a mass land speculation bubble in the lands west of the Appalachians. When the speculative bubble (caused by many people flipping land, sight unseen–does this sound familiar?) finally collapsed, the suffering was severe, but over in a couple of years.
The Panic of 1837 was driven by dramatic expansion of silver production in Mexico, starting in 1834, inflating the money supply. The collapse is partly because President Jackson, starting in 1833, starting pulling Treasury funds out of the 2nd Bank of the United States, and partly because the inflation of the money supply caused by expansion of the silver supply, caused easy credit and irrational investments. The 1837 Panic was sharp but short–following another longer Panic in 1839.
Similar panics take place throughout the 19th century, generally lasting a couple of years. In response, the Federal Research System was created in 1913 to solve this problem of boom and bust cycles. In 1929, we had a bust that lasted until World War II–and some would argue that the New Deal covered over how busted our economy still was well into the 1950s.
My guess is perhaps something like this this
I’ve read a few things from Mises.org, and what I’ve read has convinced me that it doesn’t matter what standard we’re on, the key is to get government out of the business of attempting to regulate the money supply.
Rather than having a fiat currency, or even a gold-backed one, we’d be trading in gold and silver–or some other useful precious mediums–and the value of one wouldn’t be tied to the other.
And, rather than having government try to push low interest rates, interest rates would be set solely by the market.
Ludwig von Mises makes a very good case that bubbles are caused by low interest rates–or rather, interest rates that are lower than they ought to be–because it causes individuals and businesses to over-extend themselves until it can’t be sustained anymore.
While I can’t do much about the money supply (it would take a lot of work to convince others to trade in something other than dollars), I can at least do something about interest rates: get out of debt, and never get into debt again.
Sebastian: Exactly.
Gold prevents deliberate state inflation of the monetary base and also causes awkwardness when the economy really is growing (especially when it’s doing so rapidly).
Guns and ammunition for barter?
Why trade someone the means by which they can take from you?
I have been investing heavily in copper, lead, and gunpowder for 5 years now. Initially, it was just because I was getting a little carried away when I started reloading. But then I realized that, at the rate that ammo kept going up, it made sense to just stockpile while it was cheap.
Hell, I’ve got boxes of bullets that sell for 50% more now than when I bought them 3 years ago. I wish my 401K did that well.
Given the choice between the value of the money being at the mercy of the government and at the mercy of teh commodity producres, I think I’d rather have it be the government. One of the reasons I don’t call myself a libertarian
Is there a DeBeers equivalent in the world of gold mining? Is a diamondlike artificial scarcity possible when so much gold and silver have already been mined?
Gold is a little pricey but if you have the resources keeping 10 or 20 1/10th oz US bullion coins is no different than any other WTSHTF stockpile. It’s small, easy to carry and easy to trade.
Because gold and silver have been traded for centuries, we tend to have a blind tendency to only look at gold as something to back our dollar with.
As I hinted at before, government shouldn’t be involved in something as important as money; we should do away with money, and choose our own mediums of exchange.
Besides other precious metals (such as platinum and titanium), one proposal I like is to create a “composite” money: something that’s based on a multitude of fixed commodities, such as this: a ton of steel, several tons of copper, a few barrels of oil, etc. Although such a unit of money would be subject to the change of value of each of the commodities, the combination of values stabilizes the unit of money. If oil shot up one year, or the value of steel dropped dramatically, the price of copper, or silver, or wheat, and whatever else is included in the monetary unit, would dwarf the change that occurred.
The one thing I don’t like about the idea of aggregate money is that I’d like a medium of trade that can be put in your pocket, in addition to paper representation–and it’s kind-of difficult to do that with a little bit of everything!
“Guns and ammunition for barter?
“Why trade someone the means by which they can take from you?”
I would do this for two reasons: First, I won’t trade *all* my means. Second, guns and ammo aren’t just for taking things away from others: they are also important for hunting, and for self defense.
If I have far more ammo, and far more guns, than I need (which isn’t an unreasonable assumption for a gun enthusiast, or for someone preparing for the End), it isn’t unreasonable to trade these things for food, or for a car repair, or whatnot. I get something I need, and the neighbor I give the guns to either gets something *he* needs, or I give him something that, if he *doesn’t* need (he may have his own stockpile!), he can turn around and trade it for something else.
Hey: perhaps guns and ammo are the ideal currencies I’ve been looking for! If only we could get the BATFE off our backs…
Also, if you’re trading with people you trust (and obviously you are, if you’re trading a gun), you benefit indirectly from having a better-armed community.
The short answer:
Federal Reserve Notes are worth something because the government says they are.
Gold is worth something because everyone, all over the world, throughout recorded history, says it is.
@mariner: that doesn’t actually help the case of gold any. Both are consensual determinants of value only. Gold has no intrinsic value the way, say, iron, aluminum, lead, or brass does…