Gold Is For War
Gold is a favorite for old fogies like me, but spanning the digital age gap as an early adopter of “online” in the 1980s, I grok and love crypto. Crypto is a kind of digital gold, or you might say gold is a kind of Boomer bitcoin.
People dismiss gold as a barbarous relic and governments de-emphasize its importance as a relic. So what is the point of a dense yellow metal only good for trinkets, electronic contacts and dodgy dentistry?
Why do governments keep huge piles of it in extremely heavily guarded vaults?
The answer is simple. Gold is for war. In war your paper is at a big discount and practically worthless if you are losing. Governments renege on their paper promises after wars, either by not paying out, restructuring them into dust or simply inflating the value away. In war, gold is what you pay with.
I am up to my armpits in gold, not an asset I have ever put much into up to now, because it’s crystal clear to me we are in for a lot of inflation. The market does not agree, which is very unsettling. I’m an equity guy so to watch gold trade I’m left wondering if it’s much of a real market at all. It goes up like a rocket and drops like a rock, the sort of thing you would expect from a penny stock. Gold is probably like a penny stock because there is so little real gold in play that it’s actually less liquid than bitcoin. The Comex contract trades about $1.5 billion a day (September 24, 2021) while bitcoin traded $42 billion and the gold EFT traded about $1 billion on Friday. Bitcoin trades 5% of its market cap while gold’s turnover is a fraction of that.
Conversely, bitcoin has a $900 billion market cap while gold has approximately a $8 trillion market cap. Meanwhile £148 billion of gold is mined every year versus 13 billion of bitcoin.
One way to look at this is that gold as an asset sits a long way from the market. While colossal amounts stagnate underground little is accessible in the market itself. There are lots of middle men promising proxies to gold but to actually hold it directly is actually really difficult. To me this is what holds gold back: the illiquidity, the centralization, the difficulty of ownership. Gold is clunky and surrounded by middlemen.
But like all tangible commodities it will rise in notional value with inflation and can only fall if technology finds a more efficient way or discovers a cheaper source of production. Gold is not going to get cheaper to make any time soon and without Inflation is here and here to stay.
With gold we are dealing with an illiquid asset and that is why it pumps and dumps because the whole trading volume is equivalent to a couple or three Nasdaq big caps.
So where does this get us? It means that gold isn’t going to be an instantly reacting asset. It’s effectively caged by a set of systemic factors that make it less reactive than you might expect. This leads to turgid trading because it will only go up as the value of money goes down and that is slow even though its effects are extremely damaging to wealth over extended periods.
The markets are clear, they are saying “deflationary recession” ahead. I cannot make that work in my head.
This alone makes me want to hold lots of gold, but it is a tiresome thing to be thumped by the market that sees it otherwise.
So what to do?
The answer is in the chart:
Here you have inflationist fighting deflationist over the price of gold and equilibrium is starting to form. I’m bullish, but confused why everyone isn’t also, yet in the end, I never consider myself right, only in search of a trend and an outcome.
The market contradicting me takes the shine off my bullishness, but every time I look at the fundamentals I want to buy more.
So now I am left looking at bitcoin, banned in China. Casinos, clamped down on in China. Kids banned from playing computer games and discouraged from being too educated and encouraged into physical fitness in China, rich people being clamped down on in China, China companies told not to IPO in the US and more and I wonder why?
So I look at gold and if it suddenly goes vertical I might start thinking about the market catching on to long-term inflation. However, I won’t, I’ll be thinking “gold is for war.” China takes ten years to do anything and they may have just started on a course of action to buttress itself for a more American perspective on how they deal with other countries. If that is the case it won’t be inflation that will launch gold to the stratosphere and if that is how the gold price goes I’ll be looking past minor inconveniences of economic problems to a much bigger picture.