My friend Paul Kedrosky and I were discussing the absurdity of pricing the market in Gold last week. Paul is “always uneasy about these ‘Let’s price Thing X in Commodity Y’ exercises.  (See his chart of the Dow priced in gold since 1900 here).

I decided to take that to another level, and make my gold bug friends lose their minds: As we all know, Gold (atomic symbol AU) is a barbaric relic — and the only “True” currency in the world is Silver (atomic symbol AG). That’s right, Silver.

Proof of this is how poorly Gold has performed priced in Silver.

Its obvious from the chart below that Gold has no intrinsic value. Forget QE, the Gold Miners are doing QM  Quantitative Mining. These irresponsible Miners are “printing gold” by scraping it out of the ground as fast as they can. They are debasing it as a store of value, and are no better than central bankers with their fiat currencies and printing presses.

Silver, not Gold should be the reserve currency of the world!

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See how poorly Gold has performed priced in Silver

Source: Stockcharts.com

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See also
Hey Gold Bugs, Don’t Forget About These Charts
Matt Phillips
MarketBeat, November 9, 2010
http://blogs.wsj.com/marketbeat/2010/11/09/hey-gold-bugs-dont-forget-about-these-charts/

Category: Gold & Precious Metals, Humor

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.

45 Responses to ““Quantitative Mining” Debasing Gold”

  1. machinehead says:

    LOL! Some bugs doubtless will take umbrage at Barry’s tongue-in-cheek satire.

    Interesting factoid: since 1926 (when the Ibbotson data begins), gold bullion has returned 5.15% annually compounded — almost as high as the 5.50% on long Treasury bonds, and well ahead of T-bills.

    Pretty impressive, that an asset with no yield can run neck and neck with long bonds. It couldn’t have done it without the help of the dollar destroyers at the Federal Reserve.

    Gold’s making a monkey of Bernanke.

  2. philipat says:

    Hey ho silver lining, any way I GOLD?

  3. godot10 says:

    A chart without understanding the context of the chart can be misleading

    1) The silver market is more manipulated and controlled by the bullion banks than the gold market.

    2) Silver is still just catching up to gold. Track the price to the market panic of 2008. The Gold to Silver ratio in current prices is about 50. The relative Silver to Gold abundance in the earth’s crust is about 20.

    3) Silver more industrial uses. It is slowly consumed. It does not have the hoards in vaults that gold has. If solar energy really takes off, industrial silver demand should grow.

    4) Very few primary silver mines. Silver is mostly a by-product of mines, and thus, the supply response to high prices is weak.

    Disclosure: My largest positions are in silver, then gold. Finally being rewarded for patience.

  4. machinehead says:

    By contrast, using $0.65 as the silver price in the mid-1920s, and $27.00 today, silver has returned 4.5% compounded annually over the past 84 years.

    Second place to gold, but still quite respectable, and higher than T-bills.

  5. tt says:

    cute.

    i don’t know one gold bug that is not also long the poor man’s gold.

    love your satire barry. though i suspect you are one of the wall street types that does not know the history of money in amerika.

    care to comment on the monopoly legal tender laws and when and why they were put in place.

    i come from wall st. born and raised among the top bond traders in the world. most are ignorant to the foundation they trade. some get though. and when they do, boy do they buy a mountain of gold AND silver.

    they don’t teach this stuff at harvard or state u. nor at morgan or citi………..

  6. nofoulsontheplayground says:

    The Dow:Gold chart is important because it shows a pattern that has played out well over the past 100 years showing the 36-year equity cycles. The ratio blows up in an equity bubble like 1929, 1966, or 2000, then reverts to the baseline of 4 to 5 during the middle of the cycle.

    The ratio is important because it’s on the way to the baseline right now. Furthermore, the pattern on that chart suggests we will see the ratio go to either 50 or 28 around the year 2036.

    As for Silver, Barry must know about the historic Gold:Silver ratio.

    I’m not a Gold Bug. I am technical analyst who plays probability and outcome, and recognizable, repeating patterns followed by the masses increase the chance of profitability when investing or trading.

  7. mccartbi says:

    Please tell me this post is tongue-in-cheek.

    Miners are “printing gold?” Surely you understand that the fact that the annual “flow” in terms of suppy and demand in the gold market is miniscule realtive to the outstanding “stock” is probably the most important factor recommending gold as the world’s most efficient form of money. Why is this so? Because Gold is an element, with no discernible industrial uses (save for jewelry, which is effectively money in the form of an adornment).

    Every ounce of gold ever mined is still in the marketplace (save, perhaps for a tiny portion sent to its grave as dental fillings). Ergo, any “supply” or “demand” factors have to be substantial enough to re-price the entire outstanding stock, which consists of centuries of cumulative supply. Unless you’re talking about another “gold rush,” its highly unlikely that mining activity has any effect whatsoever.

    Silver, by the way, has similar qualities. But its several uses in industry render it slightly sub-optimal as a monetary benchmark.

    Lastly, can we all please agree to stop labelling anyone who suggests that Gold has a place in the global monetary system a “Gold Bug.” Its so childish.

  8. super_trooper says:

    Why would this be surprizing? Ssilver standards was common until the 19th century.

  9. nl says:

    BR: Here’s a little hint.

    If you talk about things you don’t understand, you sound like a doofus.

    Just because YOU don’t understand the relevance of a dow/gold chart, or something of the sort, doesn’t mean that OTHER PEOPLE don’t understand.

    Just sayin’.

  10. Ilya says:

    BR: PRICELESS!

  11. mmcnelly says:

    Exactamundo… since the silver miners are far more responsible because they are clearly not scraping it out of the ground as fast as they can as shown in your graph. Hi Ho silver…keep it in the ground so it can be money.

  12. [...] other item I'll point you to is Barry's hysterical post this morning about how Quantitative Mining is "debasing the gold currency".  Gold priced in Silver looks like nthe US Dollar these days.  [...]

  13. Darkness says:

    Silver is the true ancient currency. In Egypt it was far rarer and therefore more valuable than gold.

    A currency whose value depends on how much of it you can mine . . . It’s like using pretty shells that way.

  14. ronin says:

    Ritholtz, fine, let’s make the dollar sticky with silver… anything is better than letting a group of bankers rip us off with ponzi schemes, fractional reserve banking, and inflation!!!

    Or maybe you like the current status of our world and the devious and destructive things fiat money has cursed upon us???

  15. Efficientish says:

    Barry: This is one of your best posts.

  16. franklin411 says:

    You should price gold in cow manure. At least manure has utility.

  17. may as well make money off it – AGQ Baby!!!

  18. Stirling says:

    For most of history, silver has been the primary circulating medium, and it was the official monetary basis from the 1500′s through the late 1800′s, with cut overs to a pure gold standard varying between 1840 in the UK, to the gold rush of countries starting in 1870 when exploitation of African reserves made an international gold standard practicable.

    In fact, the word “dollar” comes from Thaler, which was a silver mine in Austria.

  19. Laura says:

    Go try to get out of the country with 1 million dollars worth of silver in a suitcase although in reality I do believe that fiat currency should be backed in combination of gold and silver in baby steps. Mean while I am in Berlin with my fake wealth caused by the higher gold price buying the stuff I want on a plastic card which produces more fiction money I go to the ATM machine for Euros more than I go to the bathroom I am frustrated by the socialist that I had lunch with who think government is grand doing so much for the people I just drink more schnapps with each statement from the socialist is that good or bad.

  20. carleric says:

    Historical fact: all fiat currencis fail. Despite BR’s infatuation with “free” money from his buddy “Bennie”, at some point some standard will have to be put in place to reduce the never ending debasement of paper money of all sorts. Think not? Think Zimbabwe

  21. Ilya says:

    Thank you thank you thank you…

    I’ve been trying to convince the wife that she should covet SILVER baubles for Christmas.

    This chart may save me $$$,$$$.

  22. Myr says:

    Couple of points:

    (1) The cost of actually mining gold is infinitely more expensive than electronically printing dollars. You can’t just “debase” gold by “scraping.”

    (2) The DOW actually used to be priced in gold because each dollar was backed by gold so it does make a ton of sense to look at the DOW in terms of gold. Otherwise, you end up looking at a long term stock chart that was priced in gold at one point and then not priced in gold at another point.

    The value of gold relative to other materials is remarkably stable over the long term whereas the value of a dollar over the long term is close to nothing. That’s why it makes sense to look at the DOW priced in terms of gold.

    This post of yours is absurd and, fyi, I don’t own any gold or silver.

  23. RW says:

    What Ilya said!

    Good one BR but I say get rid of all money: Money is what introduced financial intermediation and credit to the world with seigniorage, bankers, debt collectors and other vile evils right on its heels. Back to a barter economy I say, where goods received could never exceed or be less than goods sold and a man could starve debt free or barter his children into slavery honestly and receive change in camels or cattle to boot!

  24. bobby says:

    I rarely, if ever, laugh out loud during the trading day LOL…thanks…

  25. RW says:

    Oh, yeah, and all that stuff about gold or silver yielding anything is horse manure. I had nearly a hundred troy oz’s of gold and half a dozen bags of silver in a Swiss bank for years (while recovering from the trauma of the 70′s) and all it did was cost me carry and storage until I got tired of the financial drain and sold it for a wad of fiat crap that somebody other than a goat trader in Afghanistan* would accept in exchange for something more productive.

    *I have nothing against goats mind you; quite productive in their own way and also delicious roasted.

  26. [...] On the absurdity of pricing everything in gold.  (Big Picture) [...]

  27. Brendan says:

    Haha, this is great! Judging by the comments, BR, you must have struck a nerve! Which just proves that there must be some truth to the snark.

    BTW, Wampum is the correct answer – since, after-all, historical use is far more important than modernizing economic systems. Wampum has had the longest history in the Atlantic region – and therefore should be our currency of choice, not gold. Who uses gold? Spaniards? Pshesh! Real Americans want a wampum standard!

  28. Brendan says:

    @RW – don’t forget to keep a chicken around, in case you find yourself in need of a doctor while visiting Vegas. Oh wait… Sharron Angle lost… but you still might want to keep one around, just in case.

  29. TripleSigma says:

    When they come confiscate my gold when we need it to get back on the Gold standard, I am personally going to take a sh!t on everyone one of your lawns who laugh at Goldbugs….

  30. “I decided to take that to another level, and make my gold bug friends lose their minds:…”

    wow, BR, it can’t be said that you didn’t give ample notice (to those that Read, anyway) ..

  31. Any true gold bug will be trading off the gold/silver ratio anyway. And also probably off the gold/oil one.

    silver has been getting so uppity lately they decided to smack it down the other day:

    http://www.kitco.com/reports/KitcoNews20101109DC2.html

    QE is only good for paper. Once the commodities get into the games then suddenly inflation matters again.

  32. Wallyworld says:

    LOL!!! Appreciate someone with a droll sense of humor.
    Haven’t laughed so hard since your last CRA/GSE post…

  33. RW says:

    I put cattle sh*t on my lawn every winter so no problem there but, having once been a gold bug myself, I am not unsympathetic.

    Basically, after the frenzy of the 70′s followed by the price collapse of the 80′s, I became persuaded that there was no chance of the gold standard ever returning this side of apocalypse and began speculating on gold as a commodity (after all, I spent a fair amount of time learning about it, why waste the knowledge). I have done much better since but freely confess I probably keep more gold and silver assets in my portfolio than I should (old habits die hard).

    IMO gold may appear intrinsically more trustworthy but there just isn’t enough of it above or below ground to cover modern global transactions and, even if there were, most of those transactions are electronic now which translates into an implicit extension of credit and the presence of an intermediary, a third party, guaranteeing that credit (even if only for microseconds). The extension of credit and the presence of the intermediary makes the extension of further credit a logical move and that move is always made because there is profit there.

    This is Keynes “veil of money” rather than the quantity theory: Money is not simply a means of conveyance, something temporarily involved in an exchange of goods for money or money for goods (which in effect is simply an exchange of goods); Keynes veil means that some portion of the economic structure will be financed by dated payment commitments in which banks and other financial intermediaries become central players.

    Shorter version: Capitalists rarely own capital any more, its on time payments, so they mainly own money and/or owe it. The struggle to be the dominant intermediary (which includes governments) can only intensify if the exchange unit is more rare so I don’t see how a commodity-backed currency alters that dynamic. Sorry if my gibes annoyed but that’s the way I see it.

    And FWIW I am still puzzled by the relatively weak leverage over spot exhibited by the equities of the gold majors; with gold this high one would think the main producers should be somewhere between the ionosphere and the orbit of Saturn.

  34. nickthap says:

    RW, stop making so much sense.

    I don’t understand the emotional attachment to the idea that we need to go back on the gold standard. It seems that at this point it is merely a “signifier” of your political/social beliefs, conservative/libertarian. Is the idea that the gold standard would make the Fed (and its monetary policy) redundant?

    Gold bugism seems to be the ultimate example of confirmation bias.

  35. foxorrabbit says:

    Funny stuff BR. You’re right, the silver slippers were on Dorothy’s feet the whole time! If she had only known that she had the power all along, she wouldn’t have had to waste her time walking down the gold road.

  36. foxorrabbit says:

    But Franklin411 has got you beat with his idea to back the dollar with manure… “We stand ready to give you piles of shit in exchange for your dollars…” Seriously though, let’s just all compromise on backing the dollar with a CRB basket. Deal?

  37. jeg3 says:

    I would like to see a gold to NL (Nuts & Lemons) chart for its otiosity .

  38. VennData says:

    You’ll be sorry when you don’t have anything to bribe the guards with to escape to Canada.

  39. ronin says:

    RW: Excellent post!

    But you see, you’ve found the actual positive example of a gold standard without even knowing it–as a finite regulator!

    Nowadays, what’s the most popular subject on every liberals tongue? “MAN MADE GLOBAL WARMING!”

    And how did we get there? By fractional reserve banking, credit expansion and leverage which could never be possible under a gold standard according to your post and the fact that gold as a currency is finite.

    In case you have missed that last twenty years or so, oil is peaking, the ice caps are melting, China is vacuuming up almost every resource under the sun, and the Fed keeps rates low and printing the funny money to support all these endeavors. Next time a liberal opens their mouth, ask them when they are going to stop trading in fiat currency that the Fed keeps counterfeiting on a regular basis!!!

    To all the liberals reading this: Either back the gold standard or another finite resource backed currency or STFU!!!

  40. “A barbaric relic,” as in representing the means by which imperialist monetarist systems impose a tyrannical empire’s global advantage, I quite agree.

    There certainly is no need for hard asset backing to a [superior] Hamiltonian credit system financing at most favorable terms investment in transformative infrastructure projects such as raise the productive power of the nation’s physical economy. Indeed, given that in our over 200 years of national history there have been several decisive instances when we have exercised this arrangement (as is the United States’ unique, constitutionally-mandated prerogative), this very fact, itself, is what makes hard asset backing “a barbaric relic,” as you say.

    Oddly enough, the last instance when a Hamiltonian credit system was employed in the United States was during the Great Depression, when FDR transformed Hoover’s “Reconstruction Finance Corporation” — the TARP of its day — into a virtual National Bank of the United States, financing great infrastructure investment projects across our crisis racked nation. Post-WWII this was wound down, and inch-by-inch the nation has been led into a monetarist debt trap baited with trillions upon trillions of mispriced risk. And now we are to remain further prostrate to this, first, via QE as its intended shutdown of “excess supply” proceeds to gut the labor force further, and then later by reimposition of some confining, global g0ld standard shackling our power as an organized people? When the proven superiority of a Hamiltonian credit system is woven deeply into our nation’s history we would instead choose a barbaric relic? Maybe if instead of the silver price of gold, we had the dank bud price, then I might be convinced…

  41. On cue, here is your dumb chart of the day: The cost of the Dow in ounces of gold.
    chartoftheday.com/20101112.htm?T

  42. mad97123 says:

    Price the DOW by the CRB or any index of “hard thing you can buy” (or education or heath care for that matter) and the real picture of DOW’s purchasing will emerge.

  43. [...] Ritholtz sticks the silver to [...]

  44. V says:

    If you can have contrary indicators as Newsweek magazine covers, can you also have them as blog posts?