18 January 2012

Expert says: Money spent on gold is practically wasted

Regular readers of this blog know I watch reports from Vietnam as an indicator of how Governments deal with large flows of money out of fiat and into gold. Non-first world countries feel this more I think and thus they give us a view into the future as to how first world countries will respond when they get hit with a real loss of faith in the ability of fiat to hold value over time and/or a view that there are few productive investment opportunities in the economy.

This Mineweb article on India raising import taxes on gold and silver has some interesting quotes in this respect:

"...this hike will discourage imports ... that is what the government wants, since imports have made a huge dent in India's growth story and growth seems to be flagging"

"The shift away from financial savings to something which will just lie in lockers around the country could be a large contributing factor to lower growth..."

"Another expert with a nationalised bank pointed out that money locked up in the yellow metal effectively disappears from the economy to become jewellery or sits idle in cupboards and bank lockers."

"Money spent on gold is practically wasted and it is also excluded from the financial intermediation system. Imports needed to be curbed."

"The massive jump in gold imports has also led to an increase in current account deficit."

No surprise that most of this plays on the "gold is useless" meme. In actual fact I agree with that. One's savings are better invested in productive businesses and entrepreneurs rather than an inert metal.

However, what the financiers, technocrats and politicians don't get is that movements into gold are a clear signal or vote by savers that the economy is crap. The solution is not to block the signal, but to solve the underlying problem. Actually the way to solve it is to get out of the way and stop fiddling with the economy but that would put them out of a job I suppose.

What these guys are doing is taking painkillers so the pain in their chest won't bother them. Then they'll all be surprised when they get a heart attack. Indeed, money flowing into gold is painful. That's the point.


  1. I'm not sure I understand the 'Gold locks up money in Savings' argument. Currency flows THROUGH gold, but it doesn't extinguish it. As far as I understand there's no difference between buying a tonne of Gold and a tonne of Sandwiches?

  2. "One's savings are better invested in productive businesses and entrepreneurs rather than an inert metal."

    There is a time for everything.

    And the time now is to invest heavily in inert "useless" metal as these investors are laughing all the way to the bank.

    Your comment would have merit 5 years ago and perhaps again in 10 years from now.

  3. There is a difference between buying a tonne of gold and buying an orchard.

    The gold produces nothing, the orchard will give you apples.

    These days we indirectly save/invest in "orchards", which is how it should be.

    However, these day the financial system is no longer about intermediating between saver and entrepenuer for the benefit of society as a whole but as a casino.

    The rising gold price is just a signal that some smart money (at the margin) doesn't want to play in this casino and wants to sit it out.

    Whether that will be another 10 years as Troy Ounce suggests I don't know, but I sure know I don't want anything to do with it myself right now.

  4. Bron, understand that apples have a fast declining marginal utility. In fact only days ago I was admiring my 'savings' on the apple tree, looking forward to 'spending' them at breakfast. Nary had I turned my back than the ravens had stolen the fruits of my labour!.

    What the 'men in black' fail to understand however, is that the marginal utility of .17R brass coated lead declines slowly.

    Have you ever tried Rook pie?

  5. Make that .17HMR

  6. I am certain that all governments will protect the 'system' to the detriment of savers everywhere,and print paper money to infinity.

    What to do?
    As 'Aristotle' says,
    "Gold get you some!"

  7. Bankers complaining about free markets? About savers who choose to store their wealth in gold? Dear oh dear. Let me play a sad tune on a tiny violin and commiserate.

    Fixing the debt supercycle is a tall order, obviously ... let's see ... Hey, let's abolish free markets in precious metals instead!

  8. The man who stole a leopard19 January, 2012 03:25

    If you had to put something away for 20 years for the grand children, would you choose an apple tree or a few ounces of gold?

  9. Gold will peak, and then crash just before they hit the reset button and devalue all fiat, all at once, all over the world. (Funny how that will leave the people in the know with bargains to pick up).

    Hold tight and take that pain, because if you sell and don't time your subsequent purchases right, you may not be able to get back in. Bernanke lays the whole thing out in his 11/21/2002 helicopter speech: Tie your fiat to gold, ramp gold prices, and print like crazy, ala 1933.

    Anyone who doesn't hold a substantial physical position is gambling to some extent. They could come out ahead, but the risks associated with holding anything else are many and real.

    I will exit when the currency is backed to some extent with gold.

  10. Why assume that "money flowing into gold is painful"? In an ideal world, surely this would stimulate gold-mining investment? Australia is riding high on a mining boom - for now! It, too, may well be a bursting bubble at some point.