Speech given to the Gold Investing conference
held in Geneva on May 18th 2006
Among the Anglo-Saxons, there is a school of
thought called the "Whig view of history," which sees the course of
events as an unrolling tapestry on which is woven a record of a steady,
ineluctable progression from barbarity to civilization.
Yet, ironically, the Whigs' own supremacy —
mostly enjoyed during Britain's years of commercial and military triumph in
the 18th century — was underwritten by a system of rapidly expanding
government debt, deviously and often corruptly financed through the offices
of the fledgling Bank of England.
As a result, the period was not unblemished by
periods of wild, speculative excess and interposed monetary panic, the most
spectacular instances of which were the two, partly interrelated schemes
whose respective Mississippi and South Sea Companies served to give us the
word "bubble" itself.
No one who reads the accounts of those roistering
times can fail to be entertained by the tale of human folly they contain,
though not without a rueful reflection that they also prove the Whigs were
hopelessly optimistic in their perception of man's relentless
For, indeed, our own experiences of just the past
decade show that, if we follow a recipe that mixes the eternal human failing
of avarice with the oft-recurring mass delusion that one lives in a "New
Era," and which allows the kitchen to be supervised by sharp-minded
financiers, it will produce just as explosive a cocktail today as it did
nearly three centuries ago.
But there is a more enduring lesson to be had
from such events, beyond the satisfaction of deriving a suitably uplifting
moral from such a juicy tale of scandal and excess.
Shortly after the excitement of the two bubbles
had passed, a much more momentous and enduring change began to unfold.
As David Hackett Fischer put it:
"In the very hour of the Dauphin's birth, a
deep change was silently occurring in the dynamics of European history. Once
again, an important indicator was the movement of prices. At Paris in
approximately the year 1729, the price-equilibrium of the Enlightenment
quietly approached its end. A new movement began which might be called the
price revolution of the eighteenth century."
Quoting data from Ernest Larousse, Fischer
shows that, between this time and the outbreak of the French Revolution, fuel
(firewood and charcoal) prices almost doubled and cereals went up by two-thirds
to three-quarters. Yields on government bonds, rents, and land prices all
Not entirely a coincidence, Kindleberger tells us
that the number of country banks in England expanded from "perhaps a
dozen" in 1750 to "almost 400" by the turn of the century as
their similarly profuse Scottish cousins multiplied the issue of banknotes
fifteenfold in just two decades.
Meanwhile, across the chilly North Sea, Braudel
remarked that "it was easier to borrow money in Holland in the 1750s
than … in the 1980s."
We need not deal too minutely with the several
other parallels this era offers with our world of today — the rapid
increase of trade around the globe; the growing urbanization; the swift
adoption of new techniques of industry; the infrastructure booms and busts;
the soaring military expenditures and endemic conflicts which added a
political imperative to the pre-existing financial and commercial impetus
toward indebtedness and inflation.
But what we must underscore is that this brief
narrative has been chosen to illustrate the essential truth that at all
inflations are matters of financial excess for, as the great Ludwig von Mises
is apocryphally said to have quipped, only the institution of government
could take an honest piece of paper and make it worth less through the simple
act of printing something on it.
As we ponder our lot today, it cannot be
over-stressed that the system under which we labour is as inherently
inflationary as any of which even the wildest monetary crank could dare to
Though things were bad enough when commercial
banks held only fractional reserves of something as inflexible as bullion,
they are now no longer constrained by any effective reserve system
Rather they must only comply with the protocols
of the Basel capital standard and, in truth, this is no standard at all.
To the age-old "Real Bills" fallacy
that a supposedly sound elastic currency only responds to the "needs of
business" — forgetting that business needs naturally expand when
liquidity is deep, interest rates are low, and prices are rising — we
have since added the "Real Banks" fallacy to compound it.
Under this, the intention is that restraint is
imposed because banks can lend only a multiple of their capital.
What this neglects to add is that, as liquidity
swells and credit abounds, the banks who give rise to this can effortlessly
create their own capital from thin air simply by borrowing it from one
another and from selling bonds or stock to those whose loan accounts they
themselves have just credited!
Add in the fact that our twisted ingenuity has
employed our globe-encircling computer networks to construct an ever more
extended fantasy of asset speculation on the foundations of ever thinner
slivers of "capital" (i.e., "Real Bank"-created margin)
— and the capital markets operate not so much on an equity base as on
the thinnest of junior-lien varnishes!
This is why we are able to talk of savings gluts
even as our pension provision and medical insurance schemes fall increasingly
into jeopardy and where even the most thrifty have given up the ghost (a
telling case is that of the Japanese who, from being perhaps the developed
world's best savers a decade ago, have been reduced by the "zero
interest rate policy" and "quantitative easing" to the point
where they are now barely putting more aside than their profligate American
This is why the middle-class poor are able to
"invest" so much even as they spend more than every last earned
penny on iPods, designer beers, exotic holidays, and vast McMansions —
ploughing money into ETFs and emerging bond funds even when it costs $200 a
pop to fill up the 6-year-lease-bearing new Hummer in the driveway.
This is a world, then, in which an asset such as
gold may justifiably rise to match the increase in the quantity of paper
money — but it is also one in which such an asset can itself become the
medium within which easy money incubates yet one more bubble, as may have
happened sometime in the past nine months.
In such a world, it is vitally important that we
do not confuse money — especially today's money, near limitless in its
supply — with wealth, whose own supply is, by its very essence,
Nor must we ever forget that "capital"
is not simply a digital entry, tapped effortlessly into the computer of some
financial clearing house, but that it is a useful, productive resource that
needs to be hewn from the earth, processed, and assembled — not in the
hushed, marble halls of banking, but in the harsh and unforgiving environment
of mines and quarries, fields and forests.
On the one hand, therefore, we must consider the
supply of new money — for which there is no marginal cost of
production, no lead time to be endured, and which presumes no prior
industrial capacity is in place to bring it about.
On the other, stand the two very different
demands that this money can be used to satisfy: the first for today's equally
superabundant financial assets; the second for those economically-scarce,
real resources whose production takes time, effort, ingenuity, and
entrepreneurial vision — and which, of course, requires its own inputs
of scarce resources, in turn.
In his retrospective of what was a highly
successful trading career, the great Richard Cantillon, the father of modern
economics, offered us first hand observations on these points, drawn from his
experience of both John Law's French "system" and of John Blunt's
counterpart in England.
Firstly, he spoke of what happened when
inconvertible money chased financial assets:
"The facility of a Bank enables one to buy
and sell capital stock in a moment for enormous sums without causing any
disturbance in the circulation…."
"In 1720, the capital of public stock, and
of Bubbles which were snares, and enterprises of companies at London rose to
the value of £800 million sterling, yet the purchases and sales of such
pestilential stocks were carried on without difficulty through the quantity
of notes of all kinds which were issued, while the same paper money was
accepted in payment of interest."
And, secondly, regarding the interaction of that
same money with scarce, real resources:
"An abundance of fictitious and imaginary
money causes … disadvantages … by raising the price of land and
labour, or by making works and manufactures more expensive…."
As Cantillon also pointed out, the first demand
is sometimes forced to give precedence to the second:
"As soon as the idea of great fortunes
induced many individuals to increase their expenses — to buy carriages,
foreign linen, and silk — cash was needed for all that and this broke
up all the systems…."
But, of course, that was in an age when there
still was hard cash — in the form of specie — to be had.
Our hordes of avid property speculators, our
myriad hedge fund gunslingers and our swarming private equity corsairs face
no such impediment today.
So, even though it will not collapse the bubble
in so direct a manner as it did three hundred years ago, an ever more
compelling case can be made that our environment is now in a process of
change to one in which the old-style consequences of our plethora liquidity
are at last filtering into people's pay packets and thence into the consumer
goods which they demand — and demand in a growing proportion from
For example, wages in the US private service
sector (which accounts for 80% of all employment and in which 85% of all new
jobs since the 2003 trough have been created) rose at an annualized pace of
over 6% these past three months — a pace not seen since the early 1980s
(and one given solid corroboration by the more qualitative NFIB monthly
survey of small businesses).
In fact, if we can believe the press, labour
markets are even getting tight in China (and will get tighter still if they
do succeed in paying people to stay at home on the farm instead of migrating
to the cities) and in Japan, while you only have to open the Indian papers to
read how salaries and staff turnover rates are rocketing in the world's
back-office which they call the BPO sector.
Cantillon aside, financial history provides copious
illustrations of the essential truth that, at root, all inflations are
matters of financial excess and it is hard to escape the conclusion that we
are currently in the process of adding yet another chapter to this hefty
Indeed, we would forcibly argue that, for its
scale, spread, speed, and sheer ferocity, the present inflation — not
just of money, but of all forms of credit and of the manifold derivatives
constructed thereon — is beyond all parallel.
To support this contention, we can draw attention
to the exuberance in the financial markets — not least the
record-setting flood of debt-financed takeovers and buyouts — but also
to the rise in the prices of houses, office blocks, objets d'art, diamonds,
autographs, metals, soft commodities, energy products, formerly exotic
stocks, and — until very recently — just about every variety of
Ask yourself whether the prices of all these
disparate entities are rising, or whether the price of money is falling?
Also, pace the millennialists among the gold
lovers, however misguided this "exuberance" turns out to be, this
concurrence does seem to belie the theory that for gold to do well, market
psychology must be wholly negative, that fear alone is what drives gold
Before an audience of gold bugs, I am fairly
convinced that, this far, I have been preaching to the converted — even
if I hope that I have based my sermon on a slightly different text.
However, there is one concept being banded about
here glibly and without notice, which I cannot help but deplore.
It is a supposition that is utterly unfounded,
both economically and logically and, far from being a mere foible, it is
important to extirpate it since adherence to it must seriously affect
rational thinking and investment planning.
I have personally had a long, weary experience
trying to dispel this myth and whenever I have entered the lists in this
cause, I have tended to find that my arguments have been warded off not by
any superior use of a countervailing logic, but more by resort to a slippery
and evasive terminology.
Yet, we must recognize that we can never have a
meaningful debate, or reach any viable conclusions from one, if our terms are
not laid out and rigidly and unalterably defined beforehand.
If you doubt this, just think of the verbal and
mental tangle that results from our masters' use of evasive words, or ponder
the evils visited upon us by the State in its cynical use of Orwellian
So, at last, let me come out and say it —
much though I wish it were true — and as readily as I accept that it
once was true, Gold is NOT today "money".
Nor, regrettably, under our present political
system and amid our existing cultural milieu is it ever likely to become one
Be under no misconceptions, I wish it were money.
I'm a hard core Austrian who advocates a 100%-reserve, specie standard.
I propound the need for free banking in a world
where no special legal privileges attach to the institutions that offer such
In my darker moments, I would also be tempted to
abolish the other pervasive and artificial legal privilege of limited
liability incorporation and partnership.
I dream of living in a strict-construction,
minimalist-government, constitutional republic where personal liberty and
private property are sacrosanct and in which the state is the servant of the
individual citizen, not the self-serving drover of the dumb, collective herd.
I also believe that the first series of economic
stipulations — the provision of hard money — is necessary for the
survival of this political ideal, and that, in turn, such a polity is a
precondition for the maintenance of the monetary nirvana described above.
If anyone wants a refreshingly candid
acknowledgement of the validity of this, I would refer them to Article 100 of
the Swiss constitution wherein it specifically states that, "in the
fields of credit and currency, in foreign trade and in public finance, [the
federal government] may, if necessary, depart from the principle of economic
Unfortunately, the Progressives and the New
Dealers have exorcised the spirit of Jefferson no less completely than the
Milnerites and Fabians have banished the memory of Bright and Cobden, or than
the fellow travellers of Saint-Simon have triumphed over Say, and the doctrines
of Engels have superseded those of Erhard.
But, why am I so adamant that gold is not money?
Because any meaningful definition of the term
starts and finishes with the fact that money is the medium of exchange. As
the great Fritz Machlup once put it, “money is whatever functions as
Money is the present good most readily accepted
in voluntary exchange — accepted without quibble or discount (and,
ideally, without compulsion) in final settlement of a trade by a sufficiently
large preponderance of economic agents as to be effectively universal.
The two other properties often cited as evidence
that some entity fulfils the criteria required of a money are that it is a
"unit of account," or that it is a "store of value."
But, even without bothering to ascertain whether
gold does come up to the mark on these, we should insist that these two be
recognized as the distinctly secondary and consequential concepts that they
The first — the "numeraire case"
— is merely a matter of a naturally arising calculational convenience.
It does not precede a commodity's use in monetary exchange, but rather
proceeds from it.
Now, be honest: how many of you here —
among you the most fervent of the faithful — reckoned the cost of your
airfare, or the honorarium for your speech in terms of ounces of gold, rather
than in mundane amounts of dollars, euros, or francs?
The second quality — the store of value
— is only an admirable adjunct, a desideratum, and one much more an
aspiration than an inevitability, as a glance at either today's fiat monies
or at the financial record (even under past metallic standards) will soon
That therefore gold is not money — not for
any economically important fraction of people or in any economically
significant subset of the world economy — must surely be
Had I a grain of gold in my pocket, I would not
be able to use it here to buy a drink at the bar — and that's not just
because a Swiss hotel might charge more than the value of that grain!
Had I an ounce or two of gold, I would not be
able easily to swap it for a fancy Swiss watch here in a Geneva jewellers'.
Had I ten bars of gold, I would still have to
endure substantial inconvenience, delay and suffer a painful discount
(possibly hidden as a commission) in order to swap it for a private equity
partners' company car — the Lamborghini Diablo.
Indeed, one of the high priests himself, James
Turk, recently admitted as much to the New York Times:
"Indeed, Mr. Turk has established his own
online payment system … through which he and his fellow gold bugs may
enjoy the thrill of buying goods and services via gold, not cash…"
"In some ways, it is a symbolic exercise.
While the payment system is supported by $100 million worth of gold, no
merchants have agreed to take bullion as payment, although Mr. Turk hopes
that day may come…."
Mr Turk may merit our admiration as a tireless
proponent of the virtues of gold, but what he has effectively confessed to
here is that, contrary to his many other arguments to that end, gold is not
But this is not enough for those Aurophiles who,
recognising that it serves no practical monetary purpose whatsoever, turn
this fatal weakness around and argue that the fact that so much gold is
destined to be hoarded is the thing that does makes it money, even though
this is no different than trying to contend that those pieces of canvas
carrying Van Gogh’s brushwork are ‘money’ because they,
too, carefully guarded and are not used to make sail-cloth!!!
In truth, the crowing irony is that if gold were
money, we would not be pressed to accumulate much of it at all, for money is
not wealth, but merely the medium by which wealth is transmitted from one
owner or creator to another.
Gold's apotheosis as money would therefore be
marked by a distinct dematerialization of these hoards as it was transformed
into a trustworthy facilitator of exchange, much as Alexander the Great
stripped the conquered Persians’ temples and palaces of their metal and
promptly sent it to the mint to be coined so his phalangites could pay their
hefty tavern bills.
What gold is, of course, is a scarce asset
— if, perhaps, not one which derives too much of its demand from
genuine productive use, rather than from a desire to escape some of the
problems caused by our over-abundant paper money.
As such, you may rightly judge that it continues
to suit you and your clients to count some of it in your holdings. I would
not cavil at such a choice, though I would gently point out that the success
of any seemingly sound investment is critically dependent on the initial
price one pays.
In that context, it must be noted that the
equation is an entirely different one today, at a spot price anywhere between
twice (in the case of Canada) to more than three times (as in South Africa)
that which prevailed in the major producers' local currencies when gold hit
its late 1990s lows.
Back then, only the very best managers on the
most productive properties could afford to do anything more than high grade,
indulge in financial engineering, or skimp on maintenance and investment.
In contrast, whatever political and geological
difficulties they may still face, miners have, for some while, been paid
increasingly well to try to expand output, even as they have been moved to
close out their hedges.
Be that as it may, you will each have your own
ideas about what value gold may now offer and this brings me to the stage
where it's traditional to indulge in a little stargazing.
The average conference audience is comprised of
three parts; one seeking confirmation of already-held prejudices; one third
who'd do anything for a day out of the office; and one third looking for an
instant hot tip to phone into their broker during the coffee break.
But, here I must disappoint you, for it would be
an act of folly to bet on an imminent end to this present feverish rally,
just as it would be an equal and opposite act of misjudgement to get carried
away and start Googling targets higher and higher into the stratosphere every
time the ticker grinds northwards.
Estimations of present worth are difficult enough
without introducing the uncertainties of the future.
To say, as has been said here today, that gold is
bound to appreciate against one paper currency or another (without even
specifying which or when) is not to say much at all. Nor is this sufficient
to demonstrate that gold represents the best medium by which to preserve
one's capital under all circumstances.
Forecasts, I believe, can only be made on two
time scales and even then, never more than qualitatively.
On the short (and inherently sharp) end, there
are those who have developed a feel for market positioning and who can scent
its tactical vulnerabilities. There are those who are attuned to the changing
state of the herd's delusional mindset and can decipher how it is being
guided by its own continually revised body of post-hoc myth.
These, the people who used to be called
"tape-readers," have the knack of making just enough sense out of
the surrounding cacophony to trade profitably and with sufficient regularity
for this to be beyond the confines of blind chance.
Unfortunately, I'm not one of them — nor do
I envy the Tudor-Joneses and the Trader Vics as they attempt to make sense of
the market with which they are confronted today.
Conversely, over a long haul that stretches
beyond the infamous bonds of Keynesian mortality, the basic economic verities
are undeniable and ineluctable.
Eventually, the chickens do come home to roost,
even if the misguided actions taken under the influence of a whining
collectivism or by reason of naked political cynicism can delay a recognition
of the trends and can divert their costs onto unsuspecting shoulders for
longer than many who foretell the end can credit.
Reluctantly, I cannot fail to conclude that we
are on a path toward ever less personal liberty and to ever greater
violations of the sacred rights of private property.
Thus we are on a path where genuine
entrepreneurialism and the creation of real wealth are very much hampered.
It is a path whose weary milestones are scored
with the wasteful disincentives of welfarism and which is misleadingly
signposted with the daubings of post-modernist voodoo, its billboards
shrieking the slogans of group victimhood and emblazoned with demands for the
suppression of the individual.
It is a path whose crumbling paving stones are
being overrun by the toxic, green shoots of that shrill new Inquisition which
is today's cult of environmentalism.
It is a path that echoes to the cadenced tramp of
men marching out to fight yet another vain war in the hope of postponing, by
feats of arms, the impending decline of our present suzerains.
This is also, by necessity, a path to monetary
adulteration and to a creeping corruption of body and soul.
It is a path beside which Atlas may, indeed, be
seen to shrug.
In such a world, it is likely to be the case that
people will, from time to time, seek to acquire holdings of a relatively
scarce, high value-by-weight, easily fungible, liquid, storable, real asset
as an vehicle to flee the losses intrinsic to ownership of the much less
scarce, value-haemorrhaging paper which comprises today's money.
In such a world, gold may therefore command a
higher price than it did in more innocent times when the side effects of our
ongoing decline were less severe and when the prospect of our fall was much
easier to ignore.
If you hold that this kind of dread and
defensiveness explains at least part of the metal's rise in price, these past
few years, it is hardly a cause for universal rejoicing.
For, though it is understandable that gold's
long-suffering believers now feel gloriously vindicated, they should temper
their present glee with the thought that the rally being enjoyed may be no
more than a waypoint on our road to a self-imposed and wholly unnecessary
 The Great Wave, 1996
 Paris, 1933
 A Financial History of Western Europe, 1984
 The Wheels of Commerce, 1983
 Essai sur la Nature du Commerce in Général, ca. 1730
 New York Times, May 7th, 2006
Sean Corrigan is Chief
Investment Strategist at Diapason Commodities Management (Lausanne and
Copyright © 2006 - Copyright © Diapason Commodities Management
- Sean Corrigan