What is the libertarian explanation for the drop in gold prices?

Miscellaneous Current Events
21

Thank you for your thoughts. I understand what you are saying, and even agree with you- it is “hard money” [ there was really nothing in my post to suggest otherwise as far as I can see ].

However you and I have to face the fact that in the real world gold is viewed by different individuals in different ways. To some it is indeed an investment, to others a speculation, to others still a “barbarous relic”, and to others maybe some kind of divine saviour. Because you [and I ] might believe it is “hard money” does not make it so in the general market at this time, nor at any other.

Fact: The general perception of the market for gold [or for anything else- stocks, bonds, real estate, etc.] is in a constant state of flux.

More people might see gold as “hard money” tomorrow, than do today, or maybe not- it is impossible to know for sure, and there is no way to ensure that in the future our view of what’s “right” will be reflected in other peoples scales of value, either as a group, or as individuals.

Regarding the difference between speculation and investment- I’m not sure what your point is, my only point is that if an individual puts all of the money they cannot afford to lose into gold bullion, that because gold only performs really well in a couple of different specific economic environments [ i.e. persistent inflation and political unrest], then they are effectively saying that those two particular economic environments must occur, and that therefore, essentially they are making a massive speculation, [bet, gamble], with all of their savings, no less, on the future “guaranteed” occurrence of very specific economic conditions ; economic conditions which, in the real world, cannot be guaranteed to occur within the individuals lifetime, because the economic future , in my opinion, remains largely unknowable.

Regards, obf.

22

No. This is me singing “Dreams [Anarchist Blues]” [ my own composition], live recently.

Why would you even ask that? Why don’t you simply look at my profile?

[And even if I were, what difference would that make, in your view? How would that affect the truth or falsity of what I have said?]

Regards, obf

23

Highlight added. The price of something is measured in the monetary unit. If gold is money, its “price” is always 1.0. Again, we return to what I said before: holding money (gold, paper cash, etc.) is a form of speculation against the class of “non-monetary goods”. What you are essentially saying is: “I’m better off holding cash for now because I believe non-money goods will be cheaper in the future as against the cash I am holding than they are today”. In an inflationary boom economy, this is a very safe bet.

It is driving blind and it doesn’t become any more enlightened once the money leaves your hands.

There’s a lot more thin air involved than I think you’re acknowledging here.

Clayton -

24

Corrections are bound to occur, especially when prices begin to go parabolic like they did in April 2011. I actually sold half my stash of silver at $46, but I wonder how many other austro-libertarians sold any of their holdings during that time. I’d guess that most of the investors that are subscribed to newsletters such as those by Casey Research and Agora Financial actually did not because they haven’t actually gone through much of the thought process as to why they own PMs. I think this is evident by the fact that these same newsletters always include a section that reminds the subscriber as to why they bought PMs in the first place whenever there is a correction such as the one that is occuring now. I’m sure that Casey Research and Agora Financial are being flooded with calls by subscribers that want to know why the newsletters did not tell them to sell their PMs before the correction.

Certainly; however, I wonder how many of us austro-libertarian PM havers actually have the cash the to buy PMs right now. Especially those that never sold gold at $1900 and silver at $49. I bet that they been holding on since then.

25

Hum.

I don’t know about that.

Inflation is the expansion of the supply of money, either in by adding to the monetary base (bank notes currency and bank reserves with the central bank), or through changing the multiplying effect of fractional reserve banking. If they expect an inflationary boom, they expect cash to loose value against commodities and other financial assets (except bonds), so they are worse off holding cash.

That’s why gold or real estate or equity can all be used as hedges against inflation.

You can say that gold is money and all the cash in terms of currency and deposits and savings account are something else, but in that case it is important to clarify that the inflation you were talking about was not the inflation of the money supply (of gold), but of this other financial asset (fiat money).

In this case “inflation” is just the issuance of a financial asset. Stocks are “inflated” in IPOs and follow ons. And bonds are “inflated” when new debt is issued making the credit rating of a given company drop.

Of course this is not very helpful, since gold is usually transacted agains fiat money (or maybe bonds, gold futures and gold derivatives), and seldom against anything else, which makes somewhat hard to call it money, as a means of exchange, but hey, whatever floats your boat man, I’m not here to say that money has some precise metaphysical definition.

Actually, I’m arguing precisely the opposite in the bitcoin thread. Moneyness is rather a gradient quality enjoyed by several highly liquid commodities that can be used as an exchange buffer to reduce transactions costs. And the most liquid of them (in every day life) all are the different states of fiat money known as M1, like cash or (electronic access) demand deposit accounts.

Even in terms of fiat money, it is not the same when we talk of a million dollars in cash, or in a checking account or in savings. All of these forms of a million dollars entice different transaction costs in terms of security, portability, and therefore are not equally liquid.

Even three sets of a million dollars in cash are not the same in terms of liquidity and moneyness if one is a briefcase of consecutive numbered high denomination bills, the second is a pair of large gym bags full of blood stained shuffled bills of medium denominations, and the third set is an 18-wheeler Mack truck full of dimes.

So this whole Highlander thing of “there can only be one kind of money” is pure fruitcakeness. There are several with different liquidity properties that make them more or less suitable as an exchange media buffer in transactions of certain volumes or of certain timespans or in certain venues or against certain counter-parts.

26

These analogies are certainly good to score rhetorical points with civilian audiences generally conditioned to act hostile against all things high finance, but what they actually reveal is a lack of understanding on how financial markets really operate.

An index like S&P 500 is made of certain weighted stocks of major companies.

So if you buy a basket of these stocks you are basically saying that you trust the collectivity of executives in these companies more than any other end you might have for the money you invested. Or maybe you don’t necessarily trust them that much, but you feel there is a bull market happening and you want a part in the action before everything falls apart. Generally you’re not buying a new batch of stocks in an IPO or follow on, but your buying from some fellow who happened to own these stocks, but wasn’t so confident as you, and decided to desinvest. So the money doesn’t go to the company, but to somebody else, generally unrelated. But if more people are willing to buy than sell at the current price, it will rise a bit.

And by doing that you pushed the equity value of every company listed in the S&P 500 a little bit higher. With higher equity values, the board and the executives of those companies have access to proportionally cheaper ways of raising more capital. For instance, they can simply issue more equity, since their stock is trading now at higher prices due to the entry of new investors (you).

In any case this is not blind investment, it is informed investment. You could have used the money to do many other things. You could have bought gold futures, you could have bought real estate, you could have put it in trust fund for your children college tuition, you could have seeded the startup of your nephew.

But instead you bought S&P 500. You did that because your assessment of the risk/upkeep costs/return profile of all these alternative uses of your savings turned out favorable to such a decision.

Sure, but not in the process I described. Saving income to buy stock is investing, even when you simply buy S&P 500 tracker funds. Granted it’s not the most sophisticated form of investment in the world, but it isn’t “driving blindly” either.

27

@Muff: Well, yes, if you don’t have spare cash, then you don’t have it. As for not having sold at $1,900, I don’t think it’s a “mistake” - your coins are not really less valuable today than they were two weeks ago. The dollar has not really suddenly become half again as strong as it was two weeks ago. This is a very temporary dip.

I think that you (generic) have to decide beforehand why you are moving into PMs. If it’s because you are just trying to “keep what is yours” and not lose it to inflation, then there is no need to watch the gold price closely… it’s going to go up and down and this just reflects the inevitable swings in the market as the dollar wildly moves up and down and demand for monetary goods generally increases and decreases. As long as you have the same number of coins in your safe, you haven’t lost a thing. If, however, you’re wishing to speculate on the basis of political shenanigans, then you need to watch the fundamentals very closely, not only in gold, but in silver, oil, and other commodities, as well as the general equities trends and not just in US, but internationally. You should also be reading the news closely and find alternative news sources - rt.com, aljazeera.net, antiwar.com, Asia Times, etc. basically everything that LRC links to, plus whatever other solid news you can find. Then you need to read the tea-leaves… what are they up to? Are we going to war against Iran within the year? North Korea? Who are the counter-parties to US-dollar hegemony? Is there defection within the ranks or are they maintaining solidarity? Is the EU doomed or do they have the resources to fight the US-UK-Fed syndicate? Etc. These questions point to the gross outcomes which we may be facing and, thus, are a bellwether of PMs speculative performance. War, for example, is actually bad news for PMs as it will encourage the perception that the economy is finally going to recover, that the dollar will once again be strong, and that PMs are just another industrial metal suitable only for their use in the electronic circuits of the smart bombs and Predator drones we are lobbing over Iran or North Korea. Of course, that doesn’t mean you should dump your PMs, either… people who held onto their gold through either of the World Wars came out the other side doing quite well. Once the war is over and you can safely trade your PMs, they will have retained their value just fine. So panic selling is not the answer… you will just have to accept that you are locked into PMs for the duration of the war.

Clayton -

28

I know, but you would have more cash (US dollars, etc.) to buy PM’s right now.