Picture, if you will, a group of slaves owned by a cruel man. Most of them are content, but one says to the others, “I will defy the Master.” While his statement would superficially appear to yearn towards freedom, it does not. It betrays that this slave, just like the others, thinks of the man who beats them as their “Master” (note the capital M). This slave does not seek freedom, but merely a small gesture of disloyalty. Of course, he will not get his liberty (but maybe a beating).
Today we do not have slavery, but we are shackled nevertheless. Savers are forced to use the government’s debt paper as if it were money. Most are content, but one says “gold will go up.” He does not expect a beating (but maybe a price suppression).
The slave cannot escape from his bondage, until he stops thinking of the brute as “Master” with a capital M. Freedom does not come from a little show of resentment. So long as malcontent slaves are content to limit themselves to petty disobedience, the Master is content that his rule is absolute. Freedom first takes an act of thinking. One must see the brute for what he is.
Today’s investor cannot escape from the bondage of the Federal Reserve, until he stops thinking of the dollar as “Money” with a capital M. So long as malcontent investors are content to limit themselves to betting on the dollar-price of gold, the Federal Reserve is content that its rule is absolute. Freedom takes an act of thinking. One must see the dollar for what it is.
The slave must stop using the brute’s whip to tell him what’s good and what’s bad. The investor must stop using the Fed’s credit paper to tell him what’s up and what’s down.
We continue our hiatus from capital destruction, to treat the topic of central bank concern with the price of gold. Last week , we said:
“We have said that the central banks care no more about the price of gold than they care about the price of antique Ferraris. Next week, we will drill deeper into why.”
In light of the above, we say that the central banks care not about the price of gold any more than they care about the price of a 1955 Ferrari or a 1945 Chateau Mouton Rothschild . Stocks, real estate, antique cars, wine, and gold are just different chips in the casino. They all have the same purpose, to convert the asset buyer’s capital into the seller’s income. Central bankers call this the “ wealth effect ”, and it’s an important way that they attempt to increase GDP as they manage our economy.
Let’s consider the two main arguments offered to bolster the belief that a higher gold price will lead to the gold standard, and hence the end of the Fed’s power. These explain the purported motive for why the central banks want to suppress the price of gold (we have already proved that they are not).
There Isn’t Enough Gold
Have you ever been in a discussion of the gold standard, and someone blurts that, “we don’t have enough gold for a gold standard!” There is a stock retort, given so many times, that we could recite it by rote.
“Any amount of gold is sufficient, it’s just a matter of price.”
Back when an ounce of gold traded for about 250 of the Master’s Notes, even the most defiant investors had a hard time picturing that in about a decade, the same ounce would trade for eight times as many of the Master’s now-debauched Notes. Back in 1999, some would have thought that surely gold will circulate as a medium of exchange, even at a lower price than that.
Yes, in 2011, the price did hit nearly 2000 Master Bucks. Gold did not circulate. Not only did gold not circulate, it was not close to circulating. Not only was it not close to circulating, there was not even a hint that it would ever circulate.
This is a curious environment in which to assert that the Master fears a higher price, on grounds that gold would replace His Paper when its price is sufficiently high.
There is no mechanism for high price to cause circulation. If anything, a much higher price creates an additional disincentive. If you trade away your gold, that is considered to be a sale of gold at the current price. The higher the price, the greater the loss due to tax.
Let’s use an extreme gold price because it provides a clear example: the price shoots up to $101,300. So nearly everyone has bought it $100,000 cheaper. Any sale of gold has a $100,000 capital gain. If your marginal income tax rate is 45.6%, then you lose $45,600 to tax, which is about 45% of the gold’s value. Unless you’re starving and need food, most people will decide it’s better to keep the gold.
And it should be obvious that if the price of gold quickly skyrockets to $100,000 that is not a gain in gold but a collapse of the dollar. The gold owner is not richer, the dollar owner is (much) poorer. This will not cause gold to circulate.
Tax aside, a high price does not cause gold to circulate because the obstacle blocking gold circulation is not a too-low price. This may sound like a tautology, but it’s not. What we are saying is: first understand the problem, then propose the solution.
The problem is that we all earn our incomes in dollars. We don’t have gold, unless we buy it. To buy gold you incur a loss, as you must pay the offer price. If you trade the gold for merchandise, the merchant must sell it to cover the cost of goods, rent, payroll, debt service, etc. He will sell at the bid price. The round trip loss is a significant disincentive.
Not to be confused with a nascent gold standard, there will be some use of gold in an environment where the gold price is rising predictably. In this case, just like with bitcoin, people will happily buy gold, wait for a bit, and sell it when they want to buy something. But this is not a use of gold (or bitcoin) as medium of exchange. This is using it as a free purchasing power machine. Other speculators are giving you their purchasing power, when they buy your gold (or bitcoin). They fork over their wealth, in the hopes that the next speculator will give them even more wealth later. Speculation is a process of conversion of one party’s wealth into another’s income, to be spent.
There will be an event tomorrow (March 26), which has been trumpeted by the usual suspects recently. They believe that the dollar will die. On March 26, the Shanghai exchange begins trading an oil futures contract. Now oil producers will be able to sell their oil forward and buy gold forward. Thus, they are effectively selling oil for gold. With no need for the dollar, the dollar bubble will be pricked and the dollar will go away.
There is only one problem. They don’t want gold for their oil. If they did, they would have been doing this trade since 1974 in New York. The fact that they haven’t demands an explanation. We will get back to that in a moment.
