Fun with Gold Bugs . . .
An old friend swung by the office today to chat. She is a rather well known in certain circles, a savvy investor who has done very well with miners and precious metals.
We discuss the economy, inflation, markets, oil. Near the end of her visit, she proceeds to tell me that the paper money I have is worthless, and that Gold is the only currency of any value.
“May I see your purse?” I ask.
She hands it to me.
“And your wallet is in the purse?”
She pulls out the wallet.
I open it up, remove all her cash — about $1000 in 20s and 50s — and then toss it right in the waste paper basket.
“That’s worthless, right?”
She immediately sees my point, smirks, and to prove her point, gets up to leave — without the cash. As she heads out the door, she says, “I need cab fare.” and fishes a $20 out of the garbage.
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May 31st, 2011 at 8:28 pm
Heh, heh – the janitor will be checking those waste baskets more often . . .
May 31st, 2011 at 8:29 pm
I’d be impressed if she left the rest in your wastebasket forever.
Did she come back for the cash, or did you send it to her?
Inquiring minds, and all that. . .
May 31st, 2011 at 8:34 pm
When you hold gold in your hands, there is something magical about it.
But when you try to argue with gold standard advocates that the true worth of gold is the psychological obsession related to it, well, that doesn’t usually end well.
So maybe we can go with the argument that its worth is mainly derived from the fact that it looks beautiful when used as an adornment for women (and men, to a lesser degree).
And where does that lead us?
May 31st, 2011 at 8:38 pm
BGWR,
see .. An old friend swung by the office
& .. a savvy investor who has done very well with miners and precious metals.
+ .. about $1000
~~
LSS: She left Ritholtz with the Fiat..
better Q: might be, “What’s BR going to do with ‘the Shred’?”
~~
for a ‘brush-up’, try some of http://www.rif.org/
May 31st, 2011 at 8:42 pm
I’d send her an email and invite her back next week.
May 31st, 2011 at 9:02 pm
I need a higher class of friends…
May 31st, 2011 at 9:28 pm
This reminds me of Mark Skousen’s similar encounter with an anti-Gold bug:
http://www.yijiago.com/gold-charts/my-friendly-fights-with-milton-friedman.html
My most embarrassing moment with the Friedmans came later that evening when I invited them to dinner at the best restaurant in New Orleans, Commander’s Palace, along with two friends, Gary North and Van Simmons. After we ordered and exchanged greetings, Milton turned to me and asked in a serious tone, “Mark, why are gold bugs so passionate about gold?” It was a perfect opportunity to talk about the importance of “honest money,” a theme that Ludwig von Mises, Henry Hazlitt, and other Austrian economists have taught for years. I pulled out of my jacket pocket a large oversized $20 banknote, a “gold certificate” issued in the 1920s. Together we read the words spelled out on it: “This certifies that there has been deposited in the Treasury of the United States of America TWENTY DOLLARS IN GOLD COIN payable to the bearer on demand.” I then explained, “Milton, we’re passionate about gold because under the gold standard, there’s a contract between the government and its citizens For every gold certificate issued, the government had to back it up with a $20 gold coin. Under a genuine gold standard, the Treasury can’t just print up money to pay their bills. It’s honest money.”
All along, I felt that Friedman was simply playing along, since after all, he was the world’s foremost monetary historian. I went on, “So, what kind of contract exists today between the government and its citizens? Milton, do you have a $20 bill?” He reached into his pocket and handed over a $20 bill. “See, the contract has completely disappeared. Now it only says ‘Federal Reserve Note.’ And the Fed doesn’t even pay interest!” I paused and said, “Milton, this $20 bill isn’t worth the paper it’s printed on.” And I tore it up! I ripped Milton Friedman’s $20 Federal Reserve Note into a half-dozen pieces.
Suddenly, the atmosphere changed. He turned to me and said angrily, “Mark, you had no right to destroy my property!” Rose chimed in, “Yes, Mark, you shouldn’t have done that. That was Milton’s private property.” Gary North and Van Simmons stared in horror and didn’t say a word. Milton’s voice rose, and other dinner guests looked over at us and could see emotions rising. At this point, I was worried. My relationship with the Friedmans seemed to be ending that very night. Finally, I said, “Well, I suppose you want your money back?”
They assented heartily. So I reached into my pocket and pulled out a $20 St. Gaudens Double Eagle gold coin, handed it to Milton, and said, “Okay, here’s your $20!”
He looked startled and stared at the coin. I thought he would be pleased, but I was wrong. Suddenly, he handed it back to me. “I don’t want it!”
I gulped, struggling for words. “But Milton, it’s a gift. Here, take it. It’s a $20 gold coin, worth a lot more than a $20 Federal Reserve Note.”
“No,” he repeated emphatically. “I don’t want it.”
Please place this image to the right of the preceding four paragraphs of dialogue.
After an agonizingly pregnant pause, I finally figured out a solution. Setting the coin aside, I reached into my pocket, pulled out a fresh new $20 paper note, and handed it to him. “There, okay, will this help?”
He calmed down and took the $20 bill. Gathering up some courage, I brought out the gold coin again. “Look,” I said, as I handed it over to him, “look at the date.” He examined the coin again. “Oh, 1912 — my birth year!” He laughed haltingly. Rose looked on and smiled.
I explained that the entire evening was a set-up, an opportunity for me to give him a St. Gaudens Double Eagle gold coin minted in the year he was born. The coin was in a PCGS certificated plastic container with the words, “To the Golden Milton Friedman.” I told Milton and Rose that my friend across the table, Van Simmons, was a coin dealer and had gone to great lengths to find a 1912 Double Eagle, which was rare. Van added that it had been shipped overnight from Switzerland and had arrived only an hour before dinner. I think that only then did the Friedmans recognize what was going on. The next morning they came up and thanked me for the coin and my gesture of appreciation.
Throughout the evening Gary North — a well-known economic historian and gold bug — said nothing. But in the morning, he came up to me at the conference and said something profound. “Mark, I’ve thought all night about what happened at dinner at Commander’s Palace. You and I have an ideology of gold. And Milton has an ideology of paper money. Mark, last night you attacked his ideology!”
[ You attacked her ideology, Mr. Ritholtz, and it was worth to her whatever she left in the trash to make HER point. ]
May 31st, 2011 at 9:28 pm
http://artsci.wustl.edu/~anthro/articles/09harvest.html
2.7 million times $7.50 / bushel equals….
Fun to drive around the countryside and see the golden piles….Hard to believe that pile is worth $20 million….Yeah the photo is an old pile (2005), but still. Was probably worth less than $10 million back then…
I think value and worth are going to be some interesting terms in the next 5 years…I think that the gold bugs have not even begun to be as correct as they soon will. US Congress and Prez need to get their act together sooner rather than later. And I think that Republicans will not give in on taxes. And are willing to sacrifice the country to keep the low rates.
Thanks for the story!
May 31st, 2011 at 9:45 pm
She’s early, Barry but that’s her only mistake.
If you were offered $50,000 in federal reserve notes or $50,000 in gold, but with the provision that you had to keep either one locked in a box for 5 years unable to access it, which one would you want to have waiting for you in 2016?
May 31st, 2011 at 9:52 pm
I should also add that, IMO, if gold or silver ever become more transactionable than the US issued fiat, the more baser metals of lead and brass will appreciate more rapidly than any of the precious metals.
May 31st, 2011 at 10:06 pm
Fiat currency is an excellent medium of exchange (by decree) but a terrible store of value.
It’s not either/or…. a well diversified portfolio has both… cash and precious metal.
Barry, I would be very surprised if you do not own any physical precious metal.
May 31st, 2011 at 10:12 pm
Got me some platinum!
May 31st, 2011 at 10:31 pm
Barry: In days or month’s she’ll be calling you and asking you if you tossed your worthless FRN’s in the trash.
May 31st, 2011 at 10:36 pm
I always love the false comparisons…”gold or cash in the mattress?” Like you cannot invest in anything w/ the “waste of paper that is fiat currency”
The business cycles was short and vicious and vast majority of people were basically peasants during the “Glorious Mythic Gold Standard Eutopia” that existed pre-1913. Living standards were lousy, most labor disputes ended w/ the National Guard killing workers, Bank runs were common.
“Sound Money” is the code word for it’s return to the “good ole days”.
May 31st, 2011 at 10:51 pm
Speaking of worthless, the ‘condopocalypse’ continues unabated here in suburban Chicago. This unit just took a 27.5% price cut, or $100k: http://chicago.condo.com/Condo-For-Sale_Skokie_60076_OPTIMA-OLD-ORCHARD-WOODS_1401_2-Bedroom_2-Bathroom_13367725
May 31st, 2011 at 11:04 pm
Platinum is the great catalyst for cracking hydrocarbons. Got crude?
May 31st, 2011 at 11:10 pm
Barry, maybe it is my imagination, but you do seem to be doing more and more stories about gold.
I take that as an indicator of something good for the shiny yellow stuff.
I count at least eight Arab states where people are the streets rioting and so forth. (Plus, Greece and Iran.) And the summer’s hardly begun in Saudi Arabia…It gets hot there. All it takes is one little spark.
I think we are in a period of sleepwalking. People will look back and say, “How could they not see it coming?” Whatever it is, I don’t know…but I think we are due for a dose of some bad-tasting medicine.
Things fall apart; the centre cannot hold; Mere anarchy is loosed upon the world,…
Yeats
May 31st, 2011 at 11:14 pm
I do this with people who claim that there is nothing in the Social Security Trust fund but “worthless IOUs”. I tell them I’d be more than happy to take all of their “worthless” U.S. Treasury securities off their hands.
As to gold, it’s been a while since I did the calc, but I think it would need to be somewhere North of $2800 in inflation-adjusted dollars.
Sucker bet.
May 31st, 2011 at 11:25 pm
WTF. She’s a gold bug but runs around with a grand of cash in her wallet? Something smells funny there.
May 31st, 2011 at 11:27 pm
I’m with filmotheklown, I need a higher class of friends…
May 31st, 2011 at 11:31 pm
Positives for gold:
Relatively rare. Relatively expensive to exploit as a resource. An element (not a compound or a form of an element that can be synthesized, such as carbon into diamonds), that does not tarnish, corrode, evaporate, or oxidize. Universally accepted as valuable (if I go pretty much anywhere on earth and drop a gold coin on the street, the person that finds it will keep it, because it’s valuable). It is already fungible, as money, on international markets.
We had it right in the beginning: coinage of precious and semi-precious metals — gold and its alloys as well as silver and copper and their alloys, for smaller denominations, with paper money redeemable for coinage on demand.
I don’t even know what our current coins are made of, but like our paper money, I do know that they’re cheap as shit to produce and that they’re backed by hot air.
It wasn’t a gold or silver standard that got us in trouble, it was our inability to abide by the natural (and arguably beneficial) limitations imposed by such a system. The scarcity of the metals checks both inflation and leverage.
June 1st, 2011 at 12:55 am
That’s the contra indicator I’ve been waiting for. Going short on precious metals now.
June 1st, 2011 at 3:25 am
To put the gold bug lady’s action in perspective – some % of her total assets would need to be in cash for her to meet daily needs.
It might be interesting to know what % of her movable assets are invested in gold / precious metals…
June 1st, 2011 at 4:21 am
It is becoming all too common to act as a Russian aristocrat, and we know what happened to them.
June 1st, 2011 at 7:01 am
The problem with gold is you can’t send it down a wire which is the critical attribute of a medium of exchange in this day and age.
Therefore gold can’t be a medium of exchange, just a store of value, which places a limit on how valuable it can be.
It might have more future as a universal unit of account rather than a means of payment.
June 1st, 2011 at 7:13 am
The true value of fiat money is no different from the true value of gold. Its value is the amount of things and services (cab rides) that someone is willing to give you in exchange for it. The problem with storing “value” in gold is that it is subject to a lot of speculative swings whenever the armageddon crowd get fired up or cooled down. When it comes to storing value the same rule as investing applies; diversify.
June 1st, 2011 at 7:22 am
…it’s been a pretty good investment vehicle over the last decade, anyway…
http://red-pill-blue-pill.blogspot.com/2011/04/gold-price-change-over-last-decade-in.html
June 1st, 2011 at 7:30 am
@ JamesT;
But isn’t the point about cash the fact that it is not locked up for 5 years. It has always been exchangeable for an asset if there seems to be excess of inflation. I know that the gold bugs are convinced that one morning we will all wake up and nobody will take our cash in exchange for anything – that is why I think they are nuts.
June 1st, 2011 at 7:45 am
Reall, Barry, if you believed in markets, you would have offered to trade a useless to you gold coin for useless to her paper. I would suggest a $20 gold coin for a $20 FRN.
June 1st, 2011 at 8:04 am
DeDude Says:
“I know that the gold bugs are convinced that one morning we will all wake up and nobody will take our cash in exchange for anything – that is why I think they are nuts.”
_____________
That will happen someday. Happens to all fiat currencies. The question is, sooner or later? Look at the balance sheet of our broader national/global economies, look at the trends, and do the math. There’s your freekin’ nuts (and they’re a’danglin’).
June 1st, 2011 at 8:09 am
http://www.swissamerica.com/news/articles/03-2007/a200703260338.jpg
June 1st, 2011 at 8:24 am
By using any money at all, she loses the argument. If a piece of paper can be used as cab fare, then it is not worthless, by definition.
If cab drivers accepted “Disney Dollars”, for example, then they would not be worthless.
They key event comes when the GOP refuses to raise the debt ceiling. Assuming they carry this to its logical conclusion and close the Fed, then every bank in the country would be within their right to refuse to accept US dollars, since they are no longer backed by the government. The Treasury would claim to still back the currency, but the Treasury does not “exchange” currency, it merely prints more.
I wonder how many banks and merchants will choose to accept only gold (and Euros). There would be a snowball effect for anything over about 5%. At about 95%, then your jest becomes reality. Once people stop accepting “Federal Reserve Notes”, then dollars become just like Confederate money: an interesting historical curiosity, but not a medium of exchange.
June 1st, 2011 at 9:13 am
The delusion begins when you start to think of money as a ‘thing’ rather than as a promise from other people. The thing is only a marker, like a chip in a casino.
June 1st, 2011 at 9:46 am
wally:
It’s a marker that deteriorates in value over time. The “promise” in a dollar used to equal a burger and fries at Mickey D’s. Not any more. If you’ve held on to dollars over the past 100 years, you’ve pretty much lost everything. Not much of a promise. Not the kind of thing you’d want to save, anyway. The bottom line store of value is gold. Always has been. If this isn’t so, why do central banks and national treasuries still hold it? Why was it ever illegal for private citizens to possess?
June 1st, 2011 at 10:07 am
Who the heck carries that kind of cash around? I rarely have even $100 cash in my wallet. Gold is to cash what cash is to plastic.
June 1st, 2011 at 10:09 am
BR, do you only invite “marks” to your office to “chat?”
June 1st, 2011 at 10:13 am
Petey;
There are no cases in history where you overnight went from single digit inflation to triple digit inflation. Hyper-inflation is a relatively slow growing thing in its initial steps – giving you plenty of time to get out before your losses are to high. Even the most famous hyper-inflation events did not leave you with nobody willing to exchange your cash for goods, let alone a sudden waking up and everybody overnight having decided no longer to accept cash. So history tells us that as long as you keep an eye on inflation and confidence in the currency you can easily get out of it before you suffer serious losses. Silver on the other hand can drop quite dramatically in very short time.
June 1st, 2011 at 11:21 am
Right now, there are ten posts on the front page of TBP. 3 posts are sets of links to great, discussion worthy reading. 1 is a cartoon. 5 are filled with extremely informational data. 1 is an anecdotal story about gold. Guess which one has more than double the comments of it’s next closest competitor?
People definitely have an opinion on gold. Whether it’s educated/logical or not is another matter…
June 1st, 2011 at 1:13 pm
I love this. The same notion applies for other things that are widely regarded as “worthless” such as treasury bonds and Social Security (which of course holds treasury bonds). I’ll gladly take them off the hands of anyone.
June 1st, 2011 at 2:49 pm
Could you tell me where the wastebasket is?
June 1st, 2011 at 4:24 pm
Fun with debt fools.
I had a similar argument with a friend of mine in 2009 when gold broke $1000. My first argument was; since the $20 bill is by far the most common denomination, would you rather have an ounce of 20s or an ounce of gold? She didn’t buy it so I suggested that she put up an ounce of gold and I will put up $1000 and at the end of 2 years, we swap. This is a far more realistic scenario than throwing a bunch of debt notes in a trash can. Well, the exchange is to take place in October and she keeps offering to pay me off early at 90% of spot gold. I counter with an offer to extend the swap date to next October. I wonder what Mr. Ritholtz would do? It must be frustrating to realize that everything you built you life and reputation on is built on fraud.
June 1st, 2011 at 4:34 pm
Also, what do you think Greece is doing with ALL of their bailout money? They are buying gold and will string the EU along as long as they can…
June 1st, 2011 at 7:20 pm
No George! The moral of these stories is NOT that “Women sure are dumb” Jeesh!
June 1st, 2011 at 11:23 pm
I have a high respect for my “Old Friend” Barry however the point to be made gold has been around for thousands of years as wealth there is no one paper currency that I can make this statement about. Paper currency can easily be printed by anyone as most governments are currently doing, it is a easy to use paper currency to barter for things we feel we need. I wonder if I went to a taxi driver in any country and offered him gold for my ride home how many would accept this as payment as opposed to the same amount in paper currency. I do not only see gold as currency ; before world war 11 I had 125 family members on my father’s side of the family only four lived through the war surviving on the small pieces of gold they had to get across the border to safety I wonder what paper currency could have helped saved their life’s?
I have saved gold for decades as one would have a deposit book in a bank this has been my best investment throughout the years
Laura
June 2nd, 2011 at 9:54 am
Must be nice to have so much money that you can toss $1000 in the trash. Can I be her friend too?
June 3rd, 2011 at 1:47 pm
Frankly, I resent that we have come to the point where gold has become the last option for wealth preservation. We live in a modern technological age yet we are trapped in a monetary system that was invented over a thousand years ago by a feudal aristocracy. It is a system based on fraud, designed to subjugate entire governments and peoples. Governments are forced to borrow from private bankers who invent debt out of nothing and then tax the citizenry to pay it back. I can’t imagine a more unjust and easily corruptible system yet entire economies have been built on this foundation of fraud. We pretend that Fed notes are money but they are not and they are not even a “fiat currency”. They are debt instruments with involuntary interest attached to every note. The trap we are in is that we need real wealth to get the economy going but all we have available to us is debt and debt is what got us in to this mess. Debt is not wealth and every civilization needs wealth to have any future at all. Capitalism, Communism, Republican, Democrat are all just ideological puppets in different costumes. Debt is the master of them all. Throwing these notes in the trash is symbolic of the desire to break free of the debt slavery they represent but I still prefer my swap deal to make the point.