In an article not pushing gold, Mish criticizes others for “hyping” it. He is not negative with respect to gold, just concerned about how it is “sold” or promoted.
Mish offers the following five reasons to own gold:
- Gold is a nice insurance policy against a currency crisis and I think one is coming. When or what country kicks things off that crisis, I don’t know, but I suspect it is more likely to be the Japan, Italy, or some other country in Europe as opposed to the US.
- Gold, contrary to popular myth, is actually a great hedge against deflation in the senior currency (clearly the US dollar).
- Physical gold is a currency that is not someone else’s liability and cannot be printed electronically.
- Central banks (not just the Fed) have been pouring on the liquidity as the global economy moves from one crisis to another. Odds strongly favor more coordinated central bank liquidity moves, and those liquidity moves tend to benefit gold in the long-haul.
- Should the world return to a gold standard with a 100% gold-backed dollar, $1600 an ounce will likely look like an extreme bargain.
Mish down plays “manipulation” in the article that you mention, “If nothing happens, Murphy will be on his bull horn complaining of manipulation, singing the same tired chant about gold shorts suppressing the price of gold. However, I do not believe it is possible to manipulate prices for decades against the long-term trend.”
A couple of years ago, I looked into GATA claims of large short positions by banks and, to test their claims, examined Canada’s leading bank for precious metals. I found that Bank of Nova Scotia had a large negative position in gold (~3 billion) that was backed not by gold, but by the full assets of the Bank of Nova Scotia (~39 billion). This really is a scary thought: what if a physical gold run does occur? How would BNS come up with 3 billion dollars of physical gold? I stopped holding bank stocks from that moment forward–to my knowledge most of the banks in Canada sell unallocated gold certificates, and this means that they have gold only a fractional reserve basis, if even that. This could be a fully naked short for all I know.
To be consistent, Mish should be a little bit more concerned. It is all well and good to take a sane position when it is business as usual. It reminds me of a story in Adam Ferguson’s book. An Austrian banker told a widow client that she needed to buy some Swiss Francs. She refused because the laws against holding foreign currency. Later, she had difficulty surviving when her life’s savings became worthless. At a certain point, normal rhetoric, “It’s a good idea to buy some gold,” is insufficient–We have to start screaming at people, shouting, warning them with tears in our eyes: “Do something to protect yourself!!!!” Currency devaluation is something we are used to–2-10% per year. Are we ready for 25% per year? Are we ready for 200% per year? 2000%?
The GATA people are doing a major service in that they are ringing alarm bells. At some point, I believe, the run on physical gold and silver is going to take place and those with coins and bars and those with gold mining stocks with real reserves in the ground are going to be fine. Those with every manner of paper gold and silver (esp. unallocated gold and silver) will probably be left in the cold.
Unfortunately, people like Warren Buffet repeat the mantra that gold is not an appropriate investment; economist Nouriel Roubini lies, saying that gold has no intrinsic value. To be heard above the din of this kind of nay-saying, requires a bit of over-the-top screaming and shouting. Few are willing to do that, lest they not look respectable. Yet few people in North America have a significant position in precious metals. But then, who has thought about the deep long position that Warren Buffet has on the banks with the short precious metals positions? Is he really just an honest old man, or is he using the respect that he has gained over the years as the world’s most famous investor to pump his long position and dump his short position? Just asking.