My friend and hedge fund manager pal Paul Brodsky is quoted in the WSJ discussing Gold as a Currency.

“Over the past 30 years, the correlation between the dollar and gold is minus-0.65—a high negative correlation. It means the dollar and gold are effectively on opposite ends of a seesaw. When the dollar is in favor, gold retreats. When it is under pressure, gold prices swell.

Look at the nearby chart. It is like a photo of a mountain scene reflected in a tranquil lake. The rises and falls and horizontal meanderings of gold are nearly the negative of the dollar’s.

The implication is that gold isn’t a commodity—at least not one that hews to the definition of something that people and industry consume.

Instead, “gold is a currency” whose daily price is a gauge of the market’s concern about the “potential diminishment” of the purchasing power of the dollar and other paper currencies, says Paul Brodsky, a principal at New York’s QB Asset Management.

If he is correct, it is the potential longer-term weakening of the dollar that is the real issue for the gold market, not inflation or deflation.”

If gold were a currency, you could use it at the supermarket to buy juice, eggs, milk etc. What Paul is really saying is that Gold acts like an alternative to fiat currencies, in large because it is  priced in (declining) dollars.

>

Source:
Rethinking Gold: What if It Isn’t a Commodity After All?
JEFF OPDYKE
WSJ, AUGUST 21, 2010
http://online.wsj.com/article/SB10001424052748703908704575433670771742884.html

Category: Commodities, Currency, Gold & Precious Metals

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.

50 Responses to “Is Gold a Shadow Currency ?”

  1. tawm says:

    @ BR: If gold were a currency, you could use it at the supermarket to buy juice, eggs, milk etc. What Paul is really saying is that Gold acts like an alternative to fiat currencies, in large because it is priced in (declining) dollars.

    Can’t agree more. With government debasing the US $, and no correction in sight, demand for Gold will continue. Not as tradable as food, weapons or ammunition, but historically a sound alternative.

  2. Chief Tomahawk says:

    “If gold were a currency, you could use it at the supermarket to buy juice, eggs, milk etc.”

    We’re getting closer. A commercial space at a high traffic intersection, for a long-time been an optometry/eye glass shop, then briefly had a run as a dry cleaners. Then it was vacant for six months and now has reopened as a place for people to “sell their gold”, complete with sign-twirling employee standing out front.

  3. DeDude says:

    So if the chart and correlation is right, then either gold or the dollar is overvalued and due for a correction?

    Alternatively the lack of confidence in all fiat currencies left the dollar index (value relatively to other fiat currencies) not losing value as all currencies are fled to the false safety of gold.

  4. Petey Wheatstraw says:

    Gold acts as a currency because it is pretty much universally understood as a store of value (or as being valuable). The history of mankind, in a very real, anthropological/economics sense, is a history of gold.

    Why? First, because of it’s physical characteristics (including relative scarcity, beauty, unique properties as an element, and compactness, etc.), and secondly, because of the apparent psychological effect it has on our species (if anything, we are like Bower birds when it comes to gold).

  5. Petey Wheatstraw says:

    DeDude:

    The dollar index is being propped up by synthetic scarcity and it’s undeserved status as the global reserve currency. All of the QE (and that which is to come) does not and will not show up on the index if it isn’t in circulation — and it isn’t. All that’s backing the dollar is the full faith and credit of the US. In light of the ubiquitous and obvious fraud in our business dealings, what’s that worth, at this point?

    The dollar and gold have detached. While both will fluctuate in value, I believe that the trend will be stable or up for gold, and unstable and down for the dollar. Our current deflationary trend will push the dollar higher, until social pressures force the printers and distributors of fiat scrip to do with that fiat the only thing they can do: inflate. In both circumstances, gold will maintain or increase in value.

    Or it’ll go bust, and the banks will leave their gold out back by the dumpster.

  6. Of course gold is an alternative/shadow currency. It is of little usefulness otherwise. As the author points out, it is not a commodity in the sense that wheat is a commodity. Its supply is more or less fixed and predictable, so is not subject to the whims of politicians and central bankers, which makes it especially lustrous as an alternative currency hedge against the fiats about now.

  7. call me ahab says:

    the chart is woefully weak on correlation- gold heading north- dollar flat-

    speculation obviously-

    and what of silver? I have rolls of pre-1965 silver quarters and dimes- easier to barter with than a gold ETF or gold bars- no?

    even a case of Spaghettios or a carton of Marlboros could have more cache than gold in rough times-

    and if shit really goes south- good luck cashing in your winnings on any ETF- let alone gold ETF

  8. Petey Wheatstraw says:

    ahab,

    Silver is for day-to-day trade. Gold is more of a large purchase/savings account money. You’re right about ETFs — they aren’t gold, and the do not accurately represent gold (or silver). They distort the price (in a way similar to fiat dollars created but not circulating), by distorting the perception of supply. If not, ETF shares would be real (not fiat) currency.

    When all of the fraud is exposed, all that will be left that people and powers can agree on as universal units of trade will be gold/silver.

  9. Ilya says:

    We have facial recognition programs. Might there be one for chart patterns? If so, I’d like to see a mug shot lineup of copper-dollar.

  10. wunsacon says:

    Gold is whatever (enough) people think it is to move the price. If enough people think it has value as a currency — especially if some governments declare they’ll start using gold again to back their currency — then it is a currency. (After barter economies of “pay your taxes by giving me two of your goats”, gold is one of the original fiats.) The theme might catch on, too, especially these days. So, I own a little gold/silver (SGOL, SIVR) and “hope” to catch some gains from any potential bubble in it.

    But, if something doesn’t help feed you, clothe you, become part of an important manufacturing process, *or* help you pay your tax bill (which dollars *do*), then it seems to me to serve only as a status symbol (like art). If all that CB-held/investor-held gold came back onto the market to serve the jewelry market, the price would probably drop a lot.

  11. JimRino says:

    I find the theater of “Gold” very entertaining. Where you you scaremongers when Bush was inflating the currency, and stopped printing M3 statistics?!? Beck is 8 years too late on gold.

    This is just more Political Theater. Most of “economics” is just “politics. My guess is none of you is really concerned with the state of the economy. You just want Republicans back in, because that means FRAUD is again LEGAL.

  12. Petey Wheatstraw says:

    Third try:

    Which of these is lying:

    This —

    http://www.coinlink.com/CoinGuide/images/ust_117.jpg

  13. ACS says:

    Gold is the long-term antidote to the folly of fiat currencies but is still susceptible to the short-term emotional over reactions of human psychology. That is why the chart of the Dollar index is much smoother than the chart of gold which just may be the one asset that truly is buy (physical) and hold.

  14. philipat says:

    Does this come as a surprise to anyone?

    Incidentally, there is seasonality with Gold also. And Spetember/October are the strongest months historically for a series of global reasons. QE2 anyone?

  15. JimRino says:

    I think the difference in the parties can be stated simply:
    Republicans read the Business section.
    Democrats read the Business & the Environment section.

  16. JimRino says:

    In other words “Tar Sands” are the ultimate Folly, and therefore a STUPID Investment. Will your money be caught up in the eventual Necessary Shutdown of these sites?

    http://www.theecologist.org/News/news_round_up/570518/tar_sands_campaign_targets_holidaymakers_and_pension_funds.html

  17. call me ahab says:

    This is just more Political Theater. Most of “economics” is just “politics. My guess is none of you is really concerned with the state of the economy. You just want Republicans back in, because that means FRAUD is again LEGAL.

    EXACTLY- you got us all figured out genius- a fucking mind reader I guess

  18. Petey Wheatstraw says:

    JimRino:

    I think you have this blog confused with Mish’s.

  19. TripleSigma says:

    No, not a shadow currency. The only currency– always has been, always will be.

  20. Darkness says:

    The loosening of the correlation after 2003 implies to me that’s the point that the brunt of gold’s rise gets shared across the euro and the renminbi too. If one believes the chart implies any causation at all.

  21. zot23 says:

    Gold can be trusted when a fiat currency cannot. If a person has a minimal amount of training and skill, they can bite a piece of gold and assess the purity (this actually works, maybe the most accurate part of pirate movies) within a reasonable scale. If I bite a dollar I cannot taste the inflation (unless inflation tastes like ink.)

    Once you have gold or silver in your hands, the value is fairly assured, fiat currency has no such promise. If we had a time machine and travelled back 50, 100, 200, 1000, 2000, 5000 years and you could bury any currency you liked to dig it back up in the present, what would you choose? As pretty as Confederate script was in 1864, I would have chosen gold.

    I understand the counter arguement, but it rests on the assumption that people make reasonable decisions when it comes to money and finances. I’ve made quite a bit of money on betting on the opposite side of that coin, have yet to be disappointed. People see the shiny and they lose their darn minds…

  22. Stuart says:

    This is a tiresome and very old debate by those who wish to continue making it a debating point. Gold has been money for thousands of years. It’s price movements are caught up in currency movements amongst the major and reflect the recognition as such, whether or not the machinations are in place to allow you to pay your dry cleaning bill in bullion. Custodians of competitive currencies, e.g. FIAT, guard their interests as proponents of gold do. Little doubt,little wonder why they support suppressive tactics from time to time to resist it’s ascent. A rise in interest rates risks Uncle Sam not being able to service it’s debt. The Fed’s single job now is to keep rates low. This is clear. As such, the upward ascent channel for bullion is also clear. Like retreating Nazis of WWII, the Fed et al, can slow the pace, dig in their heels, but they are going to lose the war.

  23. I think it is more accurately described as currency insurance

    @The Curmudgeon

    Of course gold is an alternative/shadow currency. It is of little usefulness otherwise.

    ======================================

    If you stick a few diamonds in it and wrap it around dinner it’ll probably buy you….ahhh……never mind

    @JimRino Says: August 22nd, 2010 at 10:44 am

    I find the theater of “Gold” very entertaining. Where you you scaremongers when Bush was inflating the currency, and stopped printing M3 statistics?!?

    ======================================

    We were here predicting approximately this mess that resulted. Where were you?

  24. RW says:

    I’ve been skeptical of gold as a non-commodity ever since I watched the traders in the gold pit beating out shorts: One hell of a lot of movement and intra-day blood spilled for something that was supposed to represent stable value.

    I suppose gold’s price movement could be explained as a function of conspiracy by central banks manipulating their currencies and/or the ‘distortion’ of ETF’s and other big players or it could be explained as a commodity primarily traded in dollars that possesses an additional cultural dimension causing deviance from expected supply/demand value.

    Occam’s Razor suggests the latter is the better answer but whatever …Keynes analogy of investing to a beauty contest (from his General theory of Employment Interest and Money) works well enough for me: “It is not a case of choosing those [faces] which, to the best of one’s judgment, are really the prettiest, nor even those which average opinion genuinely thinks the prettiest. We have reached the third degree where we devote our intelligences to anticipating what average opinion expects the average opinion to be. And there are some, I believe, who practise the fourth, fifth and higher degrees.”

    Shorter version: I invest in gold because others do and because others anticipate that others do; it means nothing to me otherwise.

  25. Darkness says:

    zot23, heh, since when is gold not a fiat currency when it does act as a currency? I mean really? Your own sweat labor is the only non-fiat currency. If you are planning for the end of civilization the only sure bet is to update your own skill set so that someone will trade your labor for what you need to live.

    Yummy smelling silk rag paper is just yummy smelling silk rag paper. Shiny pretty metal is just shiny pretty metal.

  26. dead hobo says:

    http://en.wikipedia.org/wiki/Money

    excerpt:
    —————-
    Money is any object that is generally accepted as payment for goods and services and repayment of debts in a given country or socio-economic context.

    The main functions of money are distinguished as: a medium of exchange; a unit of account; a store of value; and, occasionally, a standard of deferred payment

    ******************************
    I hate to be wonky here, but nobody, so far, until now, has even tried to define money.

    I pick “store of value” as the best choice for this topic today.

  27. Petey Wheatstraw says:

    RW Says:

    “Shorter version: I invest in gold because others do and because others anticipate that others do; it means nothing to me otherwise.”
    ______________

    Does this mean you value gold only as money? After all, what is money, if not a store of value recognized by others?

    Also, if, as you say, shiny pretty metal is just shiny pretty metal, I’ve got a chrome bumper off of a ’67 Cadillac I’d be willing to trade you for the equivalent weight of gold.

  28. Actually, I just heard a paraphrase of this recently and it really hits home well.

    Gold works best when transitioning between a dead fiat currency and whatever government comes up with to replace it

  29. b_thunder says:

    If one wants to draw any conclusions from this chart, the first thing that catches the eye is that Gold is extremely over-extended!

  30. Drewbie says:

    “If gold were a currency, you could use it at the supermarket to buy juice, eggs, milk etc.”

    It’s all a matter of time. If you offered me gold when purchasing something from me, I’d take it without a moment’s hesitation.

    In Cancun, shops accept Pesos, USD, UKP and Euro, because they’re all readily convertible locally. Silver and Gold will be the same soon, globally, once the entire fiat currency system shits it’s pants.

  31. Darkness says:

    Wheatstraw, Thanks, but I’m shopping for a Packard at the moment…

  32. Herb2 says:

    @ Darkness Says: If you are planning for the end of civilization the only sure bet is to update your own skill set so that someone will trade your labor for what you need to live.

    The surgeon for Magellan was given the island of Luzon and everything thereon as a reward for his services. Subsequent generations took a medical degree first because whether the island was being overran by Chinese, Japanese or Americans, there was always a demand for medical services that could be given in exchange for food and shelter. When times get really ugly, your gold can be stolen, which is neither theory nor fiction.

  33. X on the MTA says:

    the longest running greater-fool scheme…

  34. gbgasser says:

    “It’s all a matter of time. If you offered me gold when purchasing something from me, I’d take it without a moment’s hesitation.”

    Okay Drewbie, Ill give you my wifes gold necklace for your new car ? Wait, whats the matter?. You wanna know how much gold is in it ?……..OK its got 5 oz. No deal you say thats only about 6000$ your car is worth 20000$.
    Hey soon that 5 ozwill be worth 25000, I promise. Those dollars are gonna be worthless so it will be a fair investment for you… You get something that gonna appreciate Ill get something thats only going to depreciate, Wait… you’re not sure. Why not? Whats the hesitation

    “In Cancun, shops accept Pesos, USD, UKP and Euro, because they’re all readily convertible locally.”

    On the moon I only weigh 140 lbs!!!

  35. obsvr-1 says:

    @gbgasser Says:


    On the moon I only weigh 140 lbs!!!


    wow – that puts you about 840 lbs here on earth – either you are heading for a guinness record or need to lay off that HFCS soda from those “psuedo-variety” guys.

  36. RW says:

    @Petey Wheatstraw

    As Dead Hobo points out immediately above your query, money is a complex idea and a “store of value” may or may not be its function of interest or intent at any given moment.

    Shorter me, I meant what I wrote: Gold has no value to me aside from the value I anticipate others will place on it; that can work for money, my crop of heritage tomatoes or your ’67 Cadi bumper which I might be interested in if I anticipate someone else will want it — who knows, if they want it badly enough it could literally be worth its weight in gold, eh.

  37. zot23 says:

    @Darkness

    Absolutely hehe. Scraps of rag and shiny metals. We didn’t build human culture, develop the sciences, put men on the moon due to any currency other than blood, sweat, and tears. In fact, I’d say we made it this far in spite of all the money in the world.

    That all being said, if I had to be paid in some sort of currency (or sit on one during a crisis), I’d choose gold over paper 6 days a week and twice on Sunday ;) If times get really tight, you can always trade it to a sucker for something useful like bullets and booze.

  38. gbgasser says:

    HA , Im not quite that big obsvr-1 although sometimes I feel like it.

    Dont get me wrong about gold. I wish Id bought some a few years ago, but only so I could convert it back to US$ now. Buying it now seems like buying a house in ’07.

    Gold is a great commodity. Its a crummy way to run your currency though. Having a fixed exchange rate not only fixes the price of a dollar it fixes the price of gold.

    To those of you buying gold now in anticipation that we might return to a gold standard, you better hope we dont. Your gonna pay 1200 and the fixed exchange rate will be A LOT less than that. You’ll get creamed.

  39. I completely agree with RW. Call me crazy, but it never quite understood the value of gold. Yeah, it’s shiny and pretty. But what kind of value does it provide to us in society? Consider a world where national currencies are completely untrustworthy stores of value. That means society is in complete shambles. What in the hell are you gonna need gold for? You’d be better putting your money into buying enormous vats of gasoline and oil, or spam or something. I can see it now: SPAM, the currency of the future :-)

  40. old trader says:

    Herb2,

    “The surgeon for Magellan was given the island of Luzon and everything thereon as a reward for his services. Subsequent generations took a medical degree first because whether the island was being overran by Chinese, Japanese or Americans, there was always a demand for medical services that could be given in exchange for food and shelter.”

    Thanks for explaining why so many nurses, here in Chicago, are Philippinoes.

  41. guidoamm says:

    Fact – The purchasing power of gold has been increasing in all major currencies for the past ten years.

    Fact – For the past 8 months (like for a short period in 2005) gold and the US Dollar have been trading in lockstep

    http://guidoromero.wordpress.com/2010/08/07/are-we-comfortable-holding-our-respective-national-currencies/

    Fact – Gold is anathema to a fiat monetary system because whereas the latter is predicated on inflation thus positive money velocity, the former brings about a collapse in monetary velocity which in turn would bring about a collapse of the fiat monetary system.

    http://stockcharts.com/def/servlet/Favorites.CServlet?obj=ID3585763

    This is all empirical evidence. The rest is conjecture and speculation.

  42. gbgasser says:

    Here’s a chart for you gold bugs

    http://www.nma.org/pdf/gold/his_gold_prices.pdf

    Its not until 1971 that we see any appreciation of gold. Why is that all historical charts of gold and dollar parity only go back to mid70′s or 1980. Prior to that point they were the same thing.

    Why is it better to have a dollar and gold “be the same thing” than to have one be the thing which the other is priced in?? Why conflate the two? Its no advantage to gold is it?

  43. guidoamm says:

    To gbgasser:

    You only discern an appreciation in gold since 1971 because since about 1931 till about 1971 it was traded at an artificial government mandated fixed level to the US Dollar. Once Bretton Woods was abrogated and the gold window shut, gold traded “freely”… as much as gold can trade freely in a fiat monetary system that is.

  44. gbgasser says:

    I do understand that guidoamm. My point was there is no sense in talking about gold being an inflation hedge over the dollar historically. Since the advent of the dollar there was a fixed price of both til 1971, so they went hand in hand. After then it has traded as a pure commodity. With a fluctuating price.

    Why do you add the qualifier “as much as gold can trade freely in a fiat monetary system that is.”??
    A fiat system doesnt restrict gold from trading……………..it PRICES gold. Thats all it is. It has no influence on gold.

  45. guidoamm says:

    hmmm… yes and no.

    Gold is anathema to a fiat monetary system. So that by deliberately opting for fiat money, government must, by necessity, restrict investment and use of gold. Restriction can be overt as it was from the 30s till the late 60s or covert as it is today.

    In the 4o years from 31 to 71 the US gov was claiming a fixed price for bullion but in fact were expanding the monetary base like crazy. Hence the reason the French by the late 60s decided to return their Dollar holdings to the US and asking the equivalent in gold be returned. This then precipitated the crisis which resulted in the abrogation of Bretton Woods.

    The situation changed in style but not in substance since the closure of the gold window in 71. That is, government allowed the price of bullion to trade freely but, officially, both government and main stream institutions go out of their way to discourage the use of bullion. See in this regard Willem Buiter’s comment penned in the FT as one example of many:

    http://blogs.ft.com/maverecon/2009/11/gold-a-six-thousand-year-old-bubble/

    Even Greenspan prior to joining the Fed recognized the role gold can and should play in a monetary system.

    http://www.321gold.com/fed/greenspan/1966.html

    Thus though today gold ostensibly trades freely, even without wading into conspiratorial arguments it is clear that government is hard at work to contain the use of gold for anything other than jewelery. But beyond any other consideration, the government has no choice but to restrict the use of gold simply because government has chosen and imposed a fiat monetary system upon society. Thus, government cannot logically do otherwise.

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