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Gold Isn't Money: It's Better Than That


If anyone has any doubt that the gold market has recently been pushed around by trading in the bond market, last night gave as clear an example as one could ask for. As a headline passed regarding Biden's plan to perhaps attempt to pass a $2 trillion stimulus package hit the newswires, the bond market was smacked pretty hard. Then literally in the blink of an eye gold fell around 1%, which it subsequently clawed back over the course of the evening.

Money of the Mined I get lots of questions on this topics all the time. Gold being a macro variable, without any company-specific news to move it on most days, traders (temporarily) correlate it with various other markets. In the last couple of years we've seen gold traded based on the action of oil, the yen, the yuan, the euro, the S&P, and now the bond market. These patterns work at the margin -- especially on days where there's no other real news -- until they don't.

As the metals complex has behaved so poorly recently when the news suggests that it ought to do the opposite, I have noticed that I'm getting a lot of questions about gold itself. There is tremendous confusion it seems about the nature of money and what role gold plays in that.

First of all, money is primarily a medium of exchange that allows you to buy things and pay debts, compared to stores of value (a.k.a. assets, which are ways to preserve your wealth) such as gold, real estate, art, fractional shares of businesses (i.e., stocks), collectibles such as baseball cards or stamps, and so on. In the current era, Bitcoin may be a variation of a collectible because it has a finite supply (which all collectibles need to have).

Money on the other hand is just a means of doing things in day-to-day life. Basically, gold isn't money (a medium of exchange), it is an asset (store of wealth), although it can be used as money (with high frictional conversion costs). Stores of wealth are not money, though they can be a way to accumulate wealth.

Welcome to the Fun(gible) House It is true that for a couple of thousand years or more, money was backed by assets such as precious metals specifically because gold and silver were readily turned into non-duplicable coins. So, for eons gold was considered "money" (a medium of exchange). However, most stores of wealth cannot be mediums of exchange (money). Try "spending" a Picasso. Precious metals can be and are the easiest to turn into a medium of exchange, but money itself is simply something that you can readily use to buy or sell something else or expunge a liability, it is not itself a store of value.

Those of us who invest in precious metals (or other assets) do so because we are trying to protect our wealth from the vagaries of the central banks that have turned so many mediums of exchange into confetti.

While Bitcoin could possibly turn out to be a store of wealth, I am quite skeptical of that. Simply because something has a finite supply does not mean that ultimately it has to be worth a lot (e.g., Beannie Babies). That said, oftentimes things with a finite supply do turn out to be valuable in a period of serious monetary debasement or inflation because anything with a limited supply is destined to go up in a period where money has been debased. Thus, it's possible that Bitcoin could be some kind of a store value, although starting from current prices that might be more difficult, or it might be impossible because of other problems associated with Bitcoin.

In any case, this discussion is really not about Bitcoin at all. The point is to help people think about what precious metals are and what they are for. As I noted earlier, gold isn't money, even though it was used as money (or to back it) throughout history. It hasn't been used as such for the last 50 years at a minimum, simply because it's too restrictive for the politicians. They want "money" whose supply they can expand to fulfill the promises that they make (and probably ought not to make because they can't be kept, but that's a different discussion).

Shelter From the Storm The bottom line is that the period that is staring us in the face, where there's going to be massive deficit spending, massive monetization, and certainly the debasement of currencies, one needs to own stores of wealth. Each person can pick what they think will do the best or that they're most comfortable with or has the least risk in their mind, but you cannot go into the period ahead without stores of wealth as an important part of what you invest in. Fractional shares of businesses (i.e., stocks) can do well, but the valuations will change as the period changes and we go from one where no one is concerned about any inflation to where that changes. P/E multiples and the types of businesses that are desired will also change, and of course a lot depends on how high interest rates eventually go.

This is not meant to be a thorough discussion of all future monetary protection choices, but rather provide food for thought for people to clarify why one would want (need) to invest in gold, silver, or any other precious metal, or the companies that produce them, i.e., the miners.

Turning back to the action, the indices were higher early on, led by the Nasdaq, which gained about 0.75%. From there the market leaked the rest of the day with the indices in the red, but not too deeply.

Away from stocks, green paper was a bit weaker as was fixed income. The precious metals were green, with silver gaining over 1% as it continues to act better than gold, which was only up a couple of bucks. The miners were a mixed bag.