The Goldbugs Are Back

Time to Repeat the Money Myth

Gold is not money. It is a hedge against uncertainty.

Right now, uncertainty is high, so gold is great. The price is over $5,200 per ounce. This is up 51% in the last six months.

Bitcoin, which was supposed to be that hedge against uncertainty, is falling. Turns out it’s mostly a bet on technology. The price is barely holding $65,000 per coin and is down 41% over the last six months.

Neither gold nor bitcoin is money, although their advocates pretend it is. The gold run-up has the goldbugs doing stuff like this again. This chart is included. It claims inflation doesn’t really exist, if you’re buying and selling in gold. Measured in ounces of gold homes, cars, and college education now cost less than they have in decades. The last time things were like this was in 1980, when inflation was roaring after the second oil shock.

All charts like this are a moment in time. Most, like this one, are highly misleading. If you want to call something money to claim there’s no inflation, use Nvidia stock. It costs a lot less Nvidia stock to buy a college education today than it did 10 years ago. (You can substitute many tech stocks here. Prefer something with a history? Have a Coke.)

Time to return to Aladdin’s Cave:

When Aladdin tried to “spend” all those gems and gold he found in
his cave, what mainly happened was that the value of gems and gold
outside the cave went down.

Value, in short, is defined by scarcity, not something intrinsic.

What is Money

There is no such thing as money. Money isn’t even a noun. It’s a verb. Money is whatever facilitates the exchange of goods or services, what sits between. It’s the exchange that matters. Ben Bernanke (left) got his Nobel for proving this.

Assets are real. Gold is an asset. Bitcoin is an asset. Nvidia stock is an asset. Asset prices rise and fall continually, and there is no such thing as a sure thing. For transaction purposes, we use an asset in ample supply, one whose value can be certain as the exchange of value takes place. For the last 80 years this has meant the U.S. dollar.

Many assets cost less in gold than they did 45 years ago. Had you been a gold bug back in 1980, you might think you would have been whistling a different tune. I’m old enough to have been reporting in 1980, and gold bugs were not singing a different tune then. They were singing the same tune they are singing now. It makes you wonder about the tune.

What was different then was inflation. It was very high. You would think high inflation would lead people to gold, and that’s what the gold bugs said. Instead if led people to bonds, to notes backed by cash flows which had a solid return and could be traded just like other assets.

To grease an exchange, an asset used as “money” doesn’t have to be up or down a year after the transaction to have value. What matters, to the person making the transaction, is what that asset bought at the time of the transaction, and what the thing that was bought has done in the meantime.

The Asset Game

Currencies are assets, and currencies can rise and fall in price, just like any other asset. The current Administration is deliberately trying to drive the price of the U.S. currency lower, because that makes imports less costly. This masks the import taxes it thinks will bring Grover Cleveland back to life. (Tariffs were the main source of taxes during Cleveland’s Administration.) It’s political, it’s grifting, just like everything else in today’s politics, but it’s temporary.

The real value of the dollar depends on the size of the U.S. economy, and of all the other economic activity that is traded in dollars. That last is falling, and it may not come back. This is what our kids should be worried about, not the current price of the asset. Credibility is the coin of the realm in the asset business, and American credibility is very low right now.

The dumbest thing this Administration has done, from an economic standpoint, is to destroy the international trade regime that kept the dollar high. That trust won’t come back quickly. So maybe you want to be in Chinese Yuan, up 9.4% over the last year. I’ll bet the cost of an Oxford education, measured in Yuan, is down.

There is no certainty in asset markets. No single asset represents “money,” because money only becomes money when it’s exchanged for something. Money is the grease in the spinning gears of the global economy. But gold isn’t money, and the dollar isn’t money, and Nvidia stock isn’t money.

What makes sense for an investor here is the same thing that makes sense to any long-term investor. Don’t have all your eggs in one basket. Look ahead and adjust when needed, but don’t pretend anything is “once and for all.”

Because that’s the true money myth. That it is real.