In this exclusive interview for Matterhorn Asset
Management, Robert Blumen discusses some important but widely misunderstood
elements acting on the gold price. He explains that frequently cited gold
demand statistics have no relationship to the gold price. In addition, he
explains that the annual gold mine production is of very little influence, as
gold is hoarded, not consumed like other commodities.
Robert Blumen was born in 1964 and grew up in Boulder,
Colorado, United States. He is a graduate of Stanford University in physics
and the University of California Berkeley in engineering. He lives in San
Francisco, United States where he works in the technology sector as a
software engineer, specializing in server applications and the architecture
of scalable systems. He has maintained a lifelong interest in the Austrian
School of Economic Thought and is an avid reader in economics and finance.
His writings on gold and a variety of economic topics have been published by Financial Sense,
the Ludwig von Mises Institute, LewRockwell.com, The Dollar Vigilante, and Marc Faber's Gloom Boom and Doom letter as well as other gold and financial sites.
Lars Schall: Mr. Blumen, how did you become interested
in the subject of gold in general?
Robert Blumen: There were two main influences when I was
growing up in the 1970s and 80s. We went through a period of very high
inflation in the United States. President Nixon imposed wage and price
controls in a misguided, or perhaps very cynical, attempt to fight inflation.
And Nixon's successor, President Ford, handed out these silly little lapel
buttons that said u201CWhip Inflation Nowu201D. I remember
seeing a young man on the TV news who had reported a chain store for the
economic crime of raising the price of one of their products. He was being
given some kind of award for this.
The second historical event was the gold bull market of
the late 70s. Then Reagan came in along with Paul Volker who he inherited
from the former president, Carter. I wasn't paying much attention at the time
but it stuck with me that gold had made this huge move.
Those two things came together and had a life-long influence
on me. From that time I took away a curiosity about inflation. And that led
me eventually to be curious about the whole field of economics. I was lucky
that I came upon the Austrian School of Economics. I started reading Austrian
economics in high school. The Austrian School emphasized gold as the basis of
the monetary system and how well that has worked out over the course of human
history.
L.S.: The growing interest in gold was underlined
recently in a report that was published by the Official Monetary and
Financial Institutions Forum (OMFIF), which has the title u201CGold, the
renminbi and the multi-currency reserve systemu201C. (1) I think that this
report is quite remarkable for various reasons. Do you agree?
R.B.: The report suggests that the international monetary
system will accept gold in a more recognized way as a reserve asset. I think
that this is already true, informally. There are many signs of this. Central
banks have gone from selling to buying in recent years.
On the intellectual plane, I think there the consensus of
many decades, namely that gold had been permanently removed from its monetary
role, is changing. There is increasing discussion gold as a monetary metal
among the elites. Several years ago, Benn Steil, a
CFR economist wrote an opinion piece for the Financial Times (excerpted here) suggesting
that the global gold standard worked better than the current system of
floating rates. Robert Zoellick,
who was president of the World Bank at the time, wrote a gold-friendly op-ed also in the FT a couple of years ago.
L.S.: What is your overall view on China?
R.B.: The popular perception of China an economic
juggernaut on a path to eclipse the economies of the developed world. And how
did that happen? Because their wise central planners chose an export-driven
growth strategy. Many people now think that this strategy has gotten them to
a point where they are deficient in domestic consumption, so they need to
switch to a consumption-driven mode of economic growth; and that this also
will be accomplished by the same wise central planners through a series of
carefully designed five-year plans.
I think almost everything about this view is wrong; it is
still largely a centrally planned economy and we know from the economics of
the Austrian economist Ludwig von Mises, central planners cannot allocate resources.
L.S.: Why not?
R.B.: Mises wrote a paper in 1920, which became quite a
famous and very controversial thesis in economics that was debated for
decades. His paper was called Economic Calculation in the Socialist
Commonwealth and you can find it for free at the
Mises site.
If you have a very simple economy where people make
consumption goods with their bare hands, this can be done with central
planning. But Mises was trying to explain the economic growth that has
occurred in the world from small villages to vast modern economies with
millions of goods and a complex division of labor. How could this type of
growth occur? The process requires the development of a complex
inter-relationship of capital goods, natural resources, and division of
labor.
In a modern economy, the number of things that could be
produced is nearly unimaginably large. And the number of different production
methods for even a single good is incalculable. Take gold for example —
finding a deposit is quite complex. There are many ways to look for it. Magnetic
fields, chemistry, electrical, drilling. How much drilling and where? And
then, when you have the deposit, should it be open pit or underground? Should
a resource estimate be established first or start mining and follow the vein?
And what about the metallurgy, the chemistry? What type of electrical power?
What types of labor? Refine the ore on site, or partially refine? Build
roads, rail, or ship the ore? There are millions of decisions and each one
needs to be fully answered down to the hire or purchase of specific pieces of
capital and individual workers.
Mises' point was that all of these production decisions,
not only what gets produced and what does not, but how it's done, can only be
decided on the basis of prices. In particular Mises noted that the prices of
capital goods are crucial to production decisions. Contrary
to what you read endlessly in the financial news about consumption driving
the economy, spending on capital goods is the
major part of total spending.
Only with prices can you have accounting, which is the
ability to calculate profit and loss. In a market economic system, the
important decisions are made on the basis of an anticipated profit and loss,
which is the difference between the expected prices received on sales and the
costs.
Mises had the insight that prices of capital goods are
only a meaningful tool for resource allocation if they are established by a
competitive bidding process among entrepreneurs. Entrepreneurs must choose
how much they are willing to pay to acquire a specific capital asset and hire
the skilled workers they need. Entrepreneurs are people who put at risk their
own capital, and will either earn a profit or suffer a loss.
The diversity of entrepreneurs is a key part of this.
Each business firm or company founder has a unique view of their own market,
which may be highly detailed and based on years of experience. Mises also
noted that each entrepreneur has his idea about what the customer will want.
The market is a decentralized process in which the entrepreneur who has the
best plan for each particular asset, along with some cash, will end up in a
position to choose how that asset gets used.
In my own former job, I worked for a company that was in
a small sub-sector of a sub-sector. There are perhaps half a dozen people in
the world who truly understood our industry, maybe fewer. The entire world is
full of experts like this, people who understand a particular industry or
product really well.
Can you imagine, for example, that we would have iPhones
or Kindles if the technology industry was planned by a central committee?
Before the iPhone, competition in the mobile industry was primarily over how
many minutes per month you got on weekdays or weekends. When Steve Jobs
decided to develop the iPhone, he risked $150 million of his shareholder's
money and took on the US mobile industry, who did
not want a disruptive phone taking away the spotlight from their monthly
plans.
Central planning means the abolition of this type of
competition. And that is the problem that Mises identified. There is no way
to replace this competitive bidding process with a single planner or a
planning committee. The central committee cannot bid against itself for the
opportunity to acquire specific capital goods and labor. That would be
nothing more than the left hand bidding against the right hand. They could
assign fake prices to resources and pretend to calculate the best projects,
but the numbers that would come out of this process would not be prices, they
would be arbitrary numbers that did not reflect the best possible use of
scarce productive resources. Mises showed that a central planner has no basis
for making economic decisions, even if the process did not become entirely
politicized, as it always does.
