Fools Gold or Golds Fools–Where Are the Goldbugs Now?

A little less than four years ago, the world looked like it was about to end and gold hit an all-time high of $1,895 an ounce and the current batch of goldbugs were clamoring against the Fed. To those of us who know better, it was both funny and sad to watch…kinda like Donald Trump.images

All things being equal, if we had returned to the gold standard when Ron Paul was so vehemently proposing it, the U.S. debt today would be roughly $454 Trillion dollars because the value of gold, for curency’s sake, has to be pegged at a beginning number…which no proponent of returning to the GS has ever quantified…much less explained how the value to begin with would be derived! Even if an average over the ten years prior to Ron Paul’s call for the return, would have pegged today’s U.S. debt at a mere $375 Trillion rather than the current $18 Trillion.

In addition, there has been no signficant inflation in the last twent-five years, so despite the screeching of gold enthusiasts and fear mongers regarding our debt, the so-called “printing of money” over the last twenty five years has caused no inflation–their usual reason for returning to the God Standard. Of course the Fed cannot simply print money anyway, so the claims that it chas been doing so are borne of ignorance, like most claims by arm-chair economists.

The United States had manufactured a debt crisis, simpletons in the U.S were preaching that currency would be safer if backed by “gold instead of just being “printed” at the Fed’s whim (which is just ignorant because the Fed has no authority to print money unless requested by a bank) and Europe hadn’t been able to manufacture a solution to its actual debt crisis, caused by idiotic and ill-timed austerity, so panicky investors sought safety in the same place they had for 5,000 years: a shiny bauble.

The only problem, as you might have noticed, is that the world did not, in fact, end. It’s still here, so gold prices aren’t. The yellow metal has fallen 42 percent from its peak—and 8 percent in just the last month—despite the fact that the Federal Reserve has printed more than $1.5 trillion in this time. That, after all, is what gold aficionados said would make its price go to the moon, if not infinity and beyond. So what’s happened? Well, exactly what real economists said would happen.

Policymakers missed yesterday’s financial crisis, so maybe they’re missing tomorrow’s inflation, too is another favorite of the “gold people”…charlatans, cranks, and armchair economists have been shouting this every few years, from the penny ads that run on the bottom of websites—did you know that the $5 bill proves the stock market is on the cusp of crashing?—to Glenn Beck infomercials and even hedge fund conferences. Indeed, John Paulson, who made more fortunes than you can count betting against subprime, has been piling into gold for six years now, because he thinks “the consequences of printing money over time will be inflation.”

Simpletons all do. Goldbugs act like the Federal Reserve’s public balance sheet is a secret only they have discovered, and that it’s only a matter of time until prices explode like they did in the 1970s United States, if not 1920s Germany.

But real economists—not the appropriately named Laffers of the world–do, for the most part, know what they’re doing. Sure, they missed the crash coming in 2008, but that wasn’t because they didn’t understand how bank runs work. It was because they didn’t understand that unregulated lenders had become vulnerable to runs because AIG lied to them when telling them they AIG could cover them when mortgagees started defaulting even though they were underfunded by 35 to 1.

And the economists who haven’t forgotten their history knew that this inflation fear mongering was all wrong too. Specifically, there’s a difference between the central bank buying bonds, a.k.a. printing money, when interest rates are zero and when they’re not. In the first case, money and short-term bonds both pay the same amount of interest—none—so, as Paul Krugman has explained over and over again, printing one to buy the other won’t change anything. Banks won’t lend out any new money, and will just sit on it as a store of value instead. That’s what happened when interest rates fell to zero in 2000s Japan, and it’s what is happening now in the U.S., U.K., Japan, and Europe.

That didn’t mean, though, that gold wasn’t a good short-term investment. It was. Just not for the reason goldbugs thought. Now, one primary problem with basing our currency on gold is it doesn’t pay any interest or dividends, it costs a buttload of money to store, and when any tiny nation like Crete can cause the value to tank by just the mere hint that they might sell some of their gold stock, Russia, China, any Arab country, North Korea, etc., could literally crash our economy by selling off a fraction of their gold bullion. . So you have to pay up in the hope that it will pay off by going up in price. That usually makes it a pretty lousy investment.

That calculus changes, though, when you’re being paid to borrow—that is, when you’re paying a negative real interest rate. But when does that happen? Well, when inflation is high but interest rates aren’t quite as high, like in the 1970s, or when inflation is low but interest rates are lower still, like today.  And that, as Paul Krugman and other real economists argued, is why gold prices were going up so much even though inflation wasn’t.

It almost makes you feel bad for the goldbugs, until you remember that a substantial number of them are just trying to scare seniors and ill-informed libertarians out of their money. But the ones who aren’t, really thought the 1970s showed that gold went up when inflation did, so the fact that gold was going up now meant inflation couldn’t be far behind. They didn’t understand that the price of gold doesn’t depend on how much inflation there is, but rather on how much inflation there is relative to interest rates.

So now that rates are rising, gold, is falling like Chris Christie’s approval ratings. Wait a minute, rates are rising? Well, yes. The Federal Reserve hasn’t actually raised rates yet, but it has talked about it enough that bond markets have reacted as if it already did. That’s been enough to make real rates positive again.

Of course the goldbugs have scurried back behind the refrigerators like roaches until another convenient scam-enabling world event comes along that they can exploit.

And that screeching sound you hear is goldbugs insisting that this is just a flesh wound. Sure, gold is down a lot, but that makes this is a buying opportunity! Just wait until China starts snatching up gold as an alternative to the dollar. Then prices will shoot back up. That, at least, was the story they told themselves until earlier this week, when China revealed that it hasn’t been purchasing nearly as much gold as people had assumed.

Not only that, but a big fund dumped its gold in the middle of the night, driving the price down to a 5-year low. That’s left the goldbugs most impervious to empirical reality with nothing to say other than that “gold hasn’t lost any value, the dollar has just strengthened.” Right, and my stocks aren’t worth any less, I’d just get less money for them if I sold them.

But don’t feel too bad for the goldbugs. The best thing about predicting the apocalypse is you get ample opportunities to try again and again and again.

Harvey A. Gold