Paul Brodsky & Lee Quaintance run QB Partners, a private macro-oriented investment fund based in New York.


Investing in gold is tough because it challenges the investor to come to terms with the faults of his or her government, and then to act upon them. It requires the admission that there is risk in holding cash. This is counter-intuitive to this generation’s vintage of financial asset investor accustomed to thirty years of a credit build-up alongside declining interest rates.

There is certainly much more chatter in the press than in years past surrounding gold, and there certainly is more US retail investment (through ETFs) than there has been. That has been reflected to some degree in its rising price, no doubt. An ounce of gold has risen from about $250 in 1999 to current levels, having moved higher in each year and making it one of the best performing assets over the last ten years. So then, is a person that pays $1,100 an ounce today top-ticking the market by entering a crowded trade that has little upside and great downside?

We don’t think so.

Do your own research. Call your investment advisers and ask them what percentage, if any, they recommend investors allocate towards precious metals. Ring up prominent friends with substantial portfolios and ask them how much gold they have as a percentage of their portfolios. What about your fund managers overseeing, say $50 billion? Are they actually long $2.5 billion to $5 billion in precious metal plays? Our guess is that the figures in both cases will be very small, say 5% to 10% (if any at all).

Let’s extend this thinking. If people you know have only dipped their toes in the water and are doing more watching than investing in gold, then the past ten years of price appreciation must have come from elsewhere. Did it come from institutional investors? No, not in any great way. Most mutual and pension funds that report their holdings don’t own any gold – zip – other than very minor positions in precious metal mining stocks (and these stocks usually comprise less than 1% of their holdings). Hedge funds? Yes, it seems hedge funds have been buying gold but of those that have, most have less than 10% of their holdings in precious metals.

What about foreign central banks, Middle-East sheiks, Russians, ultra-wealthy families around the world? Yes, we would argue they “get the joke” and have been diversifying their wealth out of their home currencies and fiat currency-denominated assets into this scarcer currency.

Currently there is about $55 billion in global gold and silver ETFs – that’s it. (Does that qualify to be in the top ten of the any single issue in the DJIA?) It is estimated that all the gold mined in the last 5000 years is about 130,000 metric tons (each tonne converts into about 35,274 ounces). It’s a cube that would be roughly the size of a tennis court.

So let’s say there are 4.6 billion ounces of gold above ground, which means that at about $1,100/oz, the total global market value of all mined gold is currently worth a little over $2 trillion. By comparison, US Treasury debt was approaching $13 trillion, last we looked and we believe total US equity market capitalization is about $11 trillion. And then there are other bond markets (at least $8 trillion) money market funds, etc. There is also real estate.

In the US alone there is estimated to be about $65 trillion in present value private sector credit outstanding and trillions more in unfunded government obligations. And then there are the financial assets (stocks and bonds), real estate and public sector obligations for the rest of the world.

Global central banks are trying to keep it all afloat by printing even more money (by making more debt). The response by central banks to declining velocity has been and will continue to be the same as their responses to credit deflation – they will continue to print money. They may give it to their fractionally reserved banks that may then use the money multiplier to distribute more credit and in turn raise systemic velocity, or they may give it directly to debtors in the hope they will spend like drunken sailors again.

There is enormous embedded inflation already and more to come. The high-powered money has already been created; it is leveragable and it is there to increase velocity. Higher prices must follow.

Will the Fed and other central banks withdraw liquidity? No, never. They never have and they never will regardless of how many tools they proclaim are in their toolbox to do so. If money velocity picks up leading to rising consumer prices, it will also lead to rising market-priced interest rates. They may decide to cut back their monetization, but they will not drain money.

We can look at price inflation contemporaneously or we can throw the ball ahead of the receiver. The result will be the same. The defense is blitzing; Jerry Rice is standing all alone in the end zone; Joe Montana is going to get sacked….but the ball is already in the air.


At current valuations the gold market is a tiny speck in relation to where perceived global wealth is being housed. The fundamental issue is one of ratios and relative future value. Our bet is that the gold-to-everything-else spread will narrow substantially. We are indifferent to whether gold rises to $10,000/oz. while the DJIA stays at 10,000 or gold stays at $1,100 while stocks and bonds crater. (In fact, we would love it if gold stayed at current levels while financial assets fell because then we would greatly increase our purchasing power vis-à-vis the rest of humanity and wouldn’t owe any capital gains tax!)

Further, we think that fundamentally gold is worth many multiples of its current price. Remember, it rose from $35/oz to $880/oz in a matter of nine years from 1971 to 1980, and the piece de resistance came in the last few months when everyone had to own it and its price went parabolic (it became a bubble).

There is chatter and there are fundamentals. (Consider that 250,000 people watch CNBC on a good day and 10 million people regularly watch Good Morning America. And remember CNBC and most business media focus on financial assets, not commercial business.) We think the gold chatter is a bunch of financial asset predators talking up their businesses. Needless to say, we don’t think gold is a crowded trade.

Chinese Strategy

It seems the Chinese are the marginal price setters on the global market for consumable commodities. Recognizing they are sitting on a boatload of dollars and knowing, as they surely do, that their dollars are burning matches (or soon to be expiring coupons), it makes perfect sense that the Chinese have been loading up on commodities.

If we were running their economy, we would buy consumable commodities forward, so as not to create obvious panic-generated demand that would undermine their purposes. (Maybe they learned this in 2008 with crude?) We postulate this may be the reason for the seemingly steep contangos in so many consumable commodity markets recently.

With regard to gold, it doesn’t behoove the Chinese to reach for gold until they’ve sated their appetites in consumable commodities. To drive up gold first would simply make the USD prices of oil, copper, zinc, wheat, etc. jump as well.

It is possible that the last leg of their US dollar purge will be to reach for precious metals, which would drive up the nominal value of their huge commodity hoard. In this sequence, they would dump the maximum number of USDs forward with the least amount of pain. If they jumped into gold first, a relatively small amount of their reserves, say $100billion, would drive the price of gold to the moon. They would be left with too many dollars and nothing but higher nominal prices for consumables.

The consumable commodity markets are much deeper than gold and silver. We think rising precious metals prices will be the last leg of the Chinese grab. It would validate their strategy politically as well. (This is not to imply we think the prices of consumable commodities will rise first – just the opposite. Precious metals should rise on steadily in anticipation of the end game and consumable commodities should rise from money printing and output growth.)

Whether it knows it or not, the US CFTC is an ally of the Chinese by clamping down on western “speculators” in the consumable commodity markets. Are the Chinese effectively stealing from American investors (because Americans’ long exposure to consumables is effectively restricted)? It seems so. Like the Afghanistan copper mine bought on the cheap by the Chinese, could such machinations be a quid pro quo for China not disrupting the US Treasury market? That would make sense.


1. Cause of current economic problems: shifting macroeconomics over the last forty years are now converging:
- Abandonment of fixed currency values in 1971
- Currencies no longer a definable store of value
- Technology allowed shadow banking system to securitize and distribute credit
- Opening and new competitiveness of emerging economies altered global supply/demand equilibria for goods, services and wages
- Political dimension in developed economies stepped into the competitive breach to sustain nominal growth and employment
- Fed, BOJ, ECB, BOE extended increasing credit to banking intermediaries (credit = claims on future currency yet to be manufactured), which distorted pricing functions
- US manufacturers and distributes the world’s reserve currency, which also acts as a benchmark for floating global monetary regime (USDs = “gold”)
- Triffin’s Dilemma came to pass: Nominal global growth pressured US policy makers to continually manufacture more dollar-denominated credit to satisfy global claims
- US trade and budget deficits grew as US economy had to spend forward

Conclusion: Future global US dollar-based claims are now estimated to be above $100 trillion versus a current US dollar monetary base of about $2 trillion. Global markets, policy makers and politicians are beginning to recognize that existing US dollar-denominated public and private credit (claims) cannot be settled with current USDs outstanding. Either far more USDs must be manufactured or credit must deflate far more.

2. Expectations: Three “Flations”

- Price Inflation/Deflation: Price deflation is a natural economic function (through competition, economies of scale and innovation); price inflation (though monetary/credit inflation) is a political construct meant to offset the natural tendency of prices to decline

- Credit Inflation/Deflation: Credit inflation temporarily warps pricing structure of goods, services and wages, which leads to broad economic and asset mal-investment

- Monetary Inflation/Deflation: The only true inflation/deflation metric (“inflation is always and everywhere a monetary phenomenon…”), the growth or decline in a currency’s monetary base best defines the increase or decrease in that currency’s purchasing power over time.

Conclusion: In the current lexicon, “deflation” is commonly and mistakenly confused with economic contraction. They are very different dynamics that may not correlate. Monetary growth/contraction may cause rising/falling nominal prices over time independent of changes in supply/demand fundamentals (see Zimbabwe). Thus, money and credit growth from an economy’s political dimension could synthesize nominal output growth while real (inflation-adjusted) output and real asset values may contract. Real output and assets are produce sustainable economic capital and employment over time.

3. US Monetary Base

- M0 = Money in circulation plus bank reserves held at the Fed
- High-powered money => May be leveraged further through fractionally-reserved banking system
- M0 just increased 135% in last 18 months

4. Reflexive Cause & Effect
- Output contraction => central bank generated monetary inflation
- Monetary Inflation in the form of M0 (new money given to the banking system) unaccompanied by a further bank system multiplier effect and/or by an increase in monetary velocity (thereby increasing M1, M2, M3) will effectuate a different form of monetary inflation
- Will checks be sent to homeowners (debtors, not creditor banks) made out to their servicers?

In a global paper currency monetary regime, where banking systems do not multiply their new high-powered money and where velocity does not rise (i.e. today’s environment), price inflation is a lagging consequence of monetary inflation. Demand-led output growth does not matter; indeed contracting demand is likely to push prices higher because it engenders more aggressive policy intervention.

Q: So what has been the true rate of inflation already experienced?

A: Something closer to 135% than popular price baskets. Of course, this may not be manifest through price inflation in any discrete year and it is likely the goal of policy makers to drag it out.

Q: Will policy makers withdraw the inflation they have already created?

A: Yes, if they don’t mind economic contraction. No, if they do not want to witness substantial credit deflation leading to output contraction and rising unemployment.

Q: What will be the ultimate outcome of global central bank monetary inflation?

A: It seems inevitable that there will be a new global monetary regime. That is not as radical as it sounds, given the current one is only 39 years old and no paper money system has ever lasted throughout millennia.

Q: Would Americans suffer from a new global regime?

A: American debtors would benefit from inflation because the burden of their debts would be inflated away vis-à-vis their higher nominal wages and asset prices. American dollar holders would suffer because they would lose future purchasing power, as would dollar-denominated bondholders because the purchasing power from their coupon interest and principal repayment would be inflated away.

There are more American net-debtors than net-savers and US federal and state governments are deeply indebted. Thus, it is politically expedient for policy makers to inflate away the burden of existing and future US debt repayment (which will grow as the burden shifts from private and state debtors to the government).

Conclusion: Investor analysis should shift from defining nominal relative valuations to defining real relative valuations and investor objectives should shift from seeking nominal returns-on-assets to real ROAs.

Paul Brodsky
QB Asset Management Co.

This material is not an offer to sell or a solicitation of an offer to purchase securities of any kind. This report may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties, and we might not be able to achieve the predictions, forecasts, projections and other outcomes we may describe or imply. A number of important factors could cause results to differ materially from the plans, objectives, expectations, estimates and intentions we express in these forward-looking statements. We do not intend to update these forward-looking statements except as may be required by applicable laws. Return figures herein are estimated net of all fees and charges. Any comparisons have been obtained from recognized services or other sources believed to be reliable. No part of this document may be reproduced in any way without the prior written consent of QB Partners. Past performance may not be indicative of future results.

Category: Commodities, Think Tank

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

13 Responses to “Is Gold a Crowded Trade?”

  1. Chuck Ponzi says:


    I like the analysis, but I think it lacks the major point… that is, what is it about gold that makes one want to “invest” in it? It isn’t a traditional investment because it pays no dividends. There’s no cash flow to discount. (and the discount factors into inflation). Gold has very little use in manufacturing, and although posessing it may create some satisfaction in the form of jewelry, few people, if any, gain any satisfaction in its value going up.

    In reality, gold’s value is perception. Perception that it is stable despite history proving the contrary.

    Let’s face facts, “investing” in gold is more like “investing” in beanie babies, hoping scarcity rules the day while maintaining desirability; that it is like “investing” in a dividend paying purchase.

    Gold is the original Ponzi Scheme. It’s just been around longer.

    Chuck Ponzi

  2. pbrodsky says:

    Hello Chuck,

    Thanks for your comments. I would answer that gold has no more or less intrinsic value than any other currency. The value of USDs, JPYs, EURs, etc. is perception too. Paper currencies have their governments’ backing and nothing else does, including gold obviously.

    All we should care about is the future purchasing power of what’s in our wallets, bank accounts and portfolios. So, the currencies in which our cash or financial assets are denominated matters quite a bit. FX traders care only about relative value – usually which paper currencies will appreciate or depreciate against others. All this is doing is converting one paper currency to another, usually temporarily based on technical patterns or the perception of relative future economic strength.

    I guess the short answer is that i don’t see gold as an investment. I see it as a cash form in another currency. When gold rises or falls each day in US dollar terms, I see that as the aggregate perception of the future purchasing power of the dollar – whether investors are allocating USDs into or out of gold. I don’t see it as whether gold is perceived to be more attractive that day versus USD-denominated stocks, bonds or oil.

    Within this context, I see gold as the world’s most sustainable currency. USDs may be the second best (who knows?), which would mean gold might not appreciate as much in USD terms as it might in EUR or Yen terms. To use an extreme to illustrate my logic, I would have loved to borrow in Zimbabwe dollars five years ago to fund gold purchases. In this case, the Zimbabwe dollars are the “beanie babies”.

    Gold is not a Ponzi scheme – paper currency is.There is an infinite supply of paper. The only limit as to how much can be created and distributed is the willingness of paper takers.

    It is your right to believe that USDs or other paper currencies will have more future purchasing power than gold or anything else that you may convert your USDs into today – a barrel of oil, real estate, beanies babies, a warehouse full of flannel shirts, etc. Gold is scarce versus paper currencies and that’s what gives it its relative value.

  3. says:

    Paul, good answer to Chuck. I view gold the same way.

    People need to remember that the *price* of gold is not going up, it’s the *value* of fiat currencies that is declining.

    And for all these pundits on CNBC that say gold is a poor investment because “you can’t pay your mortgage with gold”…well, you better re-read your history book re Germany in the 1920′s. People couldn’t *lift* their marks to carry them to the bank to make a single payment. Thanks, I’ll stick with gold until the Fed and the monetarists start to show some constraint.

  4. The belief that somehow gold is safer than paper has not changed in many years. Tellingly, that belief did not change even when we went off the gold standard in 1971. The gold bugs still say exactly the same things, despite the total reversal of gold’s position in the financial world.

    Prior to 1971, gold did have a purpose. It backed paper money. Thus it was financially scarce. Today, gold is backed by nothing and backs nothing. It merely is a purposeless metal, neither the most, nor the least plentiful. It is the ultimate “greater fool” play, on a par with tulip bulbs. I’ve even met people who believe gold is safer than real estate, which not only is scarce, but has intrinsic value.

    At least the U.S. dollar is backed by the full faith and credit of the U.S. government, which is more than one could say about gold.

    Rodger Malcolm Mitchell

  5. says:

    “So then, is a person that pays $1,100 an ounce today top-ticking the market by entering a crowded trade that has little upside and great downside?

    We don’t think so.”

    +1 Excellent read, thanks!

  6. Clem Stone says:

    You are correct, i don’t know anybody who owns more than a tiny bit of gold. But guess what? In 1980 I didn’t know anybody who owned any gold at all!

  7. JohnD says:

    I am not sure why there are claims that gold has no intrinsic value here , other than the ‘next greater fool’ assertion. If readers here were to research its applications, you could find them in connectors; semiconductor/electronics manufacturing; certainly jewelry as mentioned; gold leafing and plating of everything from domes on architecture to picture frames/etc; gold dentistry; and other applications. Can you claim that for any currency? Undiscussed in the previous commentary is the fact that especially in the developing / high growth and high population areas of the world, such as China, India, Russis, SouthEast Asia and other areas, gold is highly esteemed and in demand not only as a monetary reserve, but as status symbols shown through jewelry,etc. A lot of these cultures have learned the hard way, over their millenia of existence, that it truly is the one thing [as well as other precious metals] that can be counted on. All this means is that the opinions/analysis of those claiming gold has no fundamental demand characteristics other than those for fiat currencies are quite incorrect in their beliefs, and will likely pay the price in the future if their actions follow their words.

  8. Clem Stone says:

    Maybe so, but “over their millenia of existence” sounds like a pretty long time horizon. It makes 1980 seem like yesterday and i don’t know about you, but if i’d been sitting on gold since 1980 i would have gotten a little itchy somewhere between then and now. Probably around 1981 to be exact.

  9. ‘The belief that somehow gold is safer than paper has not changed in many years.’

    In many hundred years of experience with paper currency, to be precise. It seems possible that this belief is well founded, at least that is what history would strongly suggest.

    ‘Tellingly, that belief did not change even when we went off the gold standard in 1971. The gold bugs still say exactly the same things, despite the total reversal of gold’s position in the financial world.’

    Tellingly, economists insisted in 1971 that gold would fall to $5/oz., since it had been ‘demonetized’. Instead it went from $35 to $850. It is interesting that after gold has done what it always does in secular economic contractions – namely prove its role as money by increasing in value against everything else (for 10 years and ongoing lately) – anyone could still doubt that the gold bugs have a case.

    ‘Prior to 1971, gold did have a purpose. It backed paper money. Thus it was financially scarce. Today, gold is backed by nothing and backs nothing. It merely is a purposeless metal, neither the most, nor the least plentiful. It is the ultimate “greater fool” play, on a par with tulip bulbs. I’ve even met people who believe gold is safer than real estate, which not only is scarce, but has intrinsic value.’

    A convoluted statement mixing many concepts, and wrong on all of them. It is not gold’s ‘purpose’ to ‘back paper money’, although there can be little doubt that a paper money backed by gold would be preferable to paper money backed by nothing. Gold’s scarcity is a fact of nature, it has nothing to do with whether it is in use as backing for paper money or not. As to your definitions what gold allegedly is or isn’t, you missed the most important one. Gold is the commodity that was chosen by the free market to function as money, due to its characteristics making it the most useful commodity for this purpose. This is the reason why the market continues to treat gold as if it were money, even though all governments have switched to legal tender.
    Real estate is ‘scarce’? There seems to be more than enough land , as can be ascertained by merely looking around, and lately the supply of dwellings isn’t exactly lacking either. However, be that as it may, what real estate does not possess is ‘intrinsic value’. Admittedly, neither does gold nor anything else have such value. About the only context in which the term ‘intrinsic value’ makes sense is when evaluating an in-the-money option (the extent to which it is in the money is referred to as its intrinsic value). Otherwise, all value judgments are subjective – no object anywhere in the universe possesses ‘intrinsic value’ – this is a nonsensical concept.
    In any case, gold is money. Not sure what the comparison to real estate is supposed to achieve.

    ‘At least the U.S. dollar is backed by the full faith and credit of the U.S. government, which is more than one could say about gold.’

    You have stand-up comedian potential. -vbg- Kidding aside, it is precisely because gold is ‘stateless’ and can not be printed into oblivion by central banks that it is consdidered a more valuable currency than its paper competitors. Contrary to them, its value does not rest on anyone’s promise, and it is the only money that is not at the same time someone else’s liablity. Or to paraphrase Fekete: ‘it is the ultimate extinguisher of debt’.

  10. 4053jrc says:

    I find it amazing that the “gold pays no dividend” crowd has not discovered you can easily write covered calls on GLD. I simply write 10% out of the money each quarter & have only needed to cover a couple of times in the past two years.

    Ultimately isn’t every assset a trade?

  11. The amount of gold used in electronics, architecture and dentistry is negligible. That leaves jewelry as the primary use, though I suspect the total annual uses of gold in the world wouldn’t equal one day’s production of aluminum or steel. To claim that gold’s value is based on its intrinsic value is at best disingenuous.

    The price of gold is based on the old popular wisdom that somehow gold is “safer” than fiat money, and gold in some way is “real” money while fiat money is fake. There may have been a bare iota of truth in that belief, so long as gold was the collateral for fiat money. But after 1971, that all disappeared. Today, gold is the world’s version of a speculative mania, which some authors have described as “trade in high volumes at prices that are considerably at variance with intrinsic values.” Yep, sounds like gold to me.

    But, what intrinsic value does fiat money have? Quite a bit, as it happens. The intrinsic value of fiat money is full faith and credit, a rather powerful and valuable asset. To see what “full faith and credit”‘ really offers, see:

    Rodger Malcolm Mitchell

  12. [...] Click Here to see the full post which includes more analysis: [...]

  13. boz5 says:

    A little late to this discussion, but my view on whether gold has any real value has become very simple. For quite a while, while reading about gold and hearing about it, I had the same questions as presented here: does gold really have any value? Well, I was struck with the simple idea that there will always need to be a medium of exchange and gold has served that function for a very long time. Yes, there can be barter, etc. but eventually things have to be priced in units and gold will serve. Yes, a simple idea and maybe obvious to many here, but it gave me confidence that there will always be demand for gold.