The Case for Investing in Gold

by Frost on January 18, 2011

Gold will be remonetized in the near future because the world is rapidly approaching an inglorious end to its latest failed experiment with soft currency, and gold is the most logical successor.

The first claim is a no-brainer. The United States and its NATO satellites are teetering on the edge of a financial precipice. At some point in the near future, the rest of the world is going to get tired of accepting worthless treasury bills and dollars in exchange for real, tangible goods. When that happens, we get hyperinflation.

Of course, hyperinflation could be averted by austerity measures, higher savings rates and a pragmatic re-focusing of the American economy on actually producing stuff that other people want to buy. But that’s not going to happen.

Why not? Quite simply, because America is fucked. She is broken, bankrupt, bloated and demoralized. Hopefully things will get better, one day, but it won’t be before some cleansing chaos. The only reason we haven’t already lurched into a hyperinflationary scenario is the continued mistaken belief that the US and Europe will eventually right themselves.

So: That’s why the dollar is almost certainly on it’s way out. What will replace it?

Here is where we move into uncharted waters. It’s also where a lot of goldbugs start talking nonsense about gold’s intrinsic value. In reality, there are two reasons why gold might be remonetized: 1) You can’t make more of it, and 2) It has a long history of being used as money.

For reasons explained in this essay by Mencius Moldbug (writing under the meta-pseudonym John Law) the world needs a single monetary commodity to facilitate saving. The selection of this monetary commodity is a coordination game among savers, in which each person’s optimal choice is to denominate their savings in the commodity that everyone else uses as well.

Gold is the most likely candidate because it has always been money. Everyone knows this. More importantly, everyone knows that everyone knows this. The selection of a single monetary commodity (gold, silver, or dollars) is a coordination game. You do not win by choosing the best commodity, you win by choosing what everyone else chooses. If the world loses faith in the dollar, gold will take its place because it’s what everyone else expects everyone else to expect everyone… etc

(Silver also has long history as money. I won’t speak to the gold vs. silver debate, but reading FOFOA has convinced me to re-balance my holdings in a yellow-er direction. If you’re short on time, skim his archives with a ctrl+F for “silver.”)

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All right, you say. Makes sense. Except for one thing – if the case for buying gold is so straightforward, why hasn’t the financial singularity already occurred? Why hasn’t everyone already heard this argument and converted their savings into gold?

Mainstream investors sniff at gold because they don’t think the EU and USA are clusterfucks. Or at least not complete, unsalvagable clusterfucks. Most people just can’t imagine the end of the American century.

I don’t really know what goes through the head of  “moderates” when they consider their country’s fiscal position. I guess they think that we are just one good President away from returning to the glory days of America the proud, free, prosperous hyperpower that will continue to lead the world into a new age of blah blah blah. In reality, the house is on fire and the occupants are stepping over each other’s throats to empty the silverware drawer and GTFO.

Reactionaries already understand this. We are able to consider the declinist narrative, that the United States is in her death throes, drawing down the last of the economic and cultural assets left to her by wiser, nobler, harder-working ancestors.

This information asymmetry is why it’s possible to (probably) make a small fortune by investing in gold right now. The only people who understand that the US is irredeemably up shit-creek are a small cadre of internet-dwelling oddballs who have chosen to get their information from blogs and Google Books, and we are (at most) ~1% of the population.

Now, a good rule of thumb is that if you ever find yourself with beliefs that are shared by no one else but a small group of mostly anonymous internet writers, you should probably examine those beliefs pretty carefully. But if you’re reading this, you’ve probably already found a few examples of widespread conventional wisdom that are obviously false. Sure, 99% of your peers will think you are crazy for buying gold. They’ll also think you’re crazy for not believing in The Blank Slate, Anthropogenic Global Warming, the Fat-Cholesterol Hypothesis, and a thousand other lies that have seeped from the New York Times into their skulls over the years.

To invest in gold is to invest in the eventual collapse of the American Empire in its present incarnation. Most people think that this will not happen any time soon. What about you?

Personally, I am not even close to certain that gold will be spontaneously remonetized in the foreseeable future. The amount of history, economics, game theory, and psychology required to fully understand the contemporary gold market is simply beyond the understanding of anyone who has not devoted thousands of hours to the topic.

That said, I have done a bit of homework. The case for gold has the same odor of truth present in many other modern-day heresies that are discussed in this corner of the ‘tubes. For a deeper treatment, read the FOFOA archives and the economics section of Mencius’ archives. Mangan also writes frequently on the subject. Any questions? I’ll do my amateur best to answer them.

{ 3 comments… read them below or add one }

Rivelino February 1, 2011 at 9:17 pm

what about investing in the chinese currency?

tacticalchrstn January 26, 2011 at 8:45 pm

A person cna’t go wrong with gold as a store of value over a very long time frame, but one might get burned with gold investing in the short term. We’ve had a huge run up in gold over the last few years that reminds me of the late seventies run up. People who invested in gold in 1980 had to wait a long time to see their investment return to anything close to what was paid in if they failed to sell at the peak. Gold fell sharply when the banking crisis occurred a couple of years back and has rebounded strongly since then. If the economy tanks I expect both gold and oil to fall sharply again in a “head fake” as investors flee stocks, bonds, and commodities all at once and rush back to the greenback. The headfake will not last and the dollar will become worthless as inflation takes hold, but deflation is more likely in the short term if we have a double dip recession or depression. Sooner or later the combination of peak oil and reckless fiscal policy means our society is doomed. A few of us who make all the right moves could be sitting pretty for a while though… Check out Charles Hugh Smith’s commentary on these issues.

Ancel De Lambert January 26, 2011 at 12:45 am

One quick thing to remember about the “inherent value of gold,” is, as you mentioned, it can’t be created. This goes pretty deep, as to get more gold, and therefore more money, one must put forward the cash necessary to go dig the damn stuff up. Gold is respectable because it requires effort to obtain.

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