Wednesday, July 04, 2007

Gold as catastrophic insurance?

Over the weekend Moneytalk radio host Bob Brinker chastised a caller for wanting to devote some percentage (in the area of 10%-20%) of his asset holdings to gold. The caller reasoned that in the case of some globally catastrophic event (major flu pandemic, largescale nuclear war, a big meteor hitting the planet) which sent international markets plummeting, gold represents the best stability of value guarantee. Even though T-notes and most bank investments are backed by the US Treasury, the infrastructure might not be there to deliver the cash, which in any case would probably be of little value due to astronomical inflation.

Brinker doesn't like commodity investments period, as the investment advice he dispenses is consistently targeted at the valuation of assets at retirement. And in terms of realizing a competitive return over some extended period of time, gold is really the bottom of the barrel, worth about the same today as it was worth in 1980. Brinker, in rejecting the caller's suggestion, agreed that gold is a bulwark against major losses during a recession, but so are treasuries, especially I-bonds which offer protection against inflation. Better to hold those, as they will continue to modestly gain value during much more frequent periods of economic growth.

It seems to me the two were talking past one another. Gold serves as an economic anchor, performing well during downturns. After the tech bubble burst earlier in the decade, gold rose steadily until the beginning of '06, and has since inched back downwards, suggesting the economic slump is fully behind us. Similarly, it spiked in the late seventies and early eighties during a period of high inflation. During the recession of '87, it also shot upwards, reaching a highmark that it wouldn't return to for more than a decade. Although comparisons over several centuries are confounded by new deposit discoveries (potentially altering the price of gold significantly without respect to other economic indicators), gold reached its zenith just as Columbus was sailing westward, presaging the era of the most explosive economic growth in the history of modern man.

This in contrast to I-bonds, which merely hold their value during recessions (but don't hemorrhage value during periods of economic growth or dollar strengthening).

The caller wanted absolute assurance, period, while Brinker wanted absolute assurance assuming the US federal government continued to exist as it does today. In his antagonism toward commodities, Brinker refused to give his approval, which was all the caller had sought after in the first place.

Brinker should've delved into the caller's plans more deeply, instead of rejecting him out-of-hand. If the goal is to find a guarantor of economic value given the most catastrophic of circumstances, how is he holding the gold? If he's using a company like Kitco, is he planning on using a pool account, storing with a global bank like HSBC, or keeping the bullion at his own residency? Only the latter would make sense, given an infrastructure meltdown.

Has he considered what might be superior even to bullion in the basement? Like ten pound cans, jugs of water, knives, firearms, a maintained garden, gasoline and kerosene reserves on-hand, a bike with durable tires, residency outside of metro conurbation and preferably even outside of the suburbs, proximity to a stocked body of water, fishing equipment, keeping in good shape, and the like? If a disastrous return to the primordial state came upon our world, these concerns easily trump what sort of currency stores he has in storage.

7 comments:

MensaRefugee said...

Sweet Post.

I hate the average economic illiteracy these days.

Anonymous said...

In a PAW situation you want to have as much ammo as possible to barter with. Get common calibers. In New Orleans, cops were short of 9mm and were bartering for it. Just imagine that situation writ large. If I am correct that you live in KS Audacious, you are in a pretty gun friendly place. I can't imagine that land way out in the sticks would be expensive either. Maybe you should set up a bug out location (AND KEEP IT AND THE SPECIFICS OF YOUR PREP TO YOURSELF).
If it hits the fan big time, I am probably going to be screwed here in NJ. Still got my guns though. If you don't have any firearms, you might want to think about it(again, in common calibers, no exotic stuff. Get a caliber you can use. I think a .44 magnum is a great round, too bad I can't hit the side of a barn with it. A hit with a "weak" round like a .32 beats a miss with a hand cannon). I'm not so much worried about a total economic collapse as I am about a natural disaster (New Orleans style) or a race conflict. Like I always say, see Thomas Chittum for more.

Audacious Epigone said...

Mensarefugee,

Thanks. I amazed at how many people, in casual conversations, tell me how great their company stock is performing--it's been all the way in the sixties for five years!

Anon,

Thanks for the suggestions. I need to get a couple. Kansas is friendly to it. And my family has a secluded little lake cabin in the hinterland.

I've had a little experience firing from an M14, but I'm firearm-illiterate. I've a few machetes and an 8-inch Chinese stainless that I adore, but I live on the outskirts of the metro area.

MensaRefugee said...

Not examining some of the deeper or more esoteric theories...

The value of gold seems to derive from its use as a form of proto-currency.

i.e A currency in the absence of a state or a well functioning state.

Much economic activity require the smooth exchange of resources. For e.g Farmers wont farm nearly as much if they had to exchange their produce through barter. An economy without money will tend to make people specialize less so the proportion of people in farming to the proportion of people in other activities will grow. Circa 1900, 70% of Americans were farmers, circa 2000 - a mere 1-2%

However with gold, people once again have a commonly agreed upon bargaining chip aka money - which will facilitate people specializing again - to everyone's benefit. Its store of value would seem to come from its compactness (compare for instance with the use of Tobacco plants as money) and relative difficulty in mining/extracting.

Of course a percentage of the economy gets shunted towards 'non-productive', at least at face value, gold production - but this is a small price to pay to reduce the number of farmers [and concurrently increase the number of engineers,doctors (insert useful profession here] from 70% to 2%

Anonymous said...

And if you wear corrective lenses, get lasik surgery if you are a candidate for it. It isn't cheap, but I realized that my prep wasn't worth a damn if I lost my glasses/contacts. If you can't see, I don't care how well prepared you are. Just keep your head down when the shooting starts!

MensaRefugee said...

Off Topic.
But Weston A Price in "Nutrition and Physical Degeneration" persuasively documented that complete lack of need for vision correction among eskimos when they were on a traditional diet whereas now I believe 40-50% of them need glasses.

Some other people, if I recall correctly, have linked insulin to eyesight - so maybe good food preserves good eyesight (though perhaps does not reverse damage?)

Audacious Epigone said...

Yikes. Glaucoma would be pretty nasty if you were holed up. I eat too much fructose-laden garbage. I really should try to cut down the most unnecessary consumption of it.