To complete my analysis of why gold is a bad investment, I wanted to add in some empirical evidence on top of the logical points I made previously. There are two primary areas where empirical evidence can be applied, assessing a return to the gold standard and looking at the recent performance of the metal and the companies that mine it.
Not all gold bugs will advocate for a gold standard; most are able to recognize the restrictions it places on an economy. But some hardcore gold bugs will tell you that an economy will run much smoother, since the money stock is regulated by a hard asset, not the whims of central bankers and paper that can be created from nothing. Moreover, a lot of the faults of a gold standard, outside of its economic feasibility have more recently been cured; people wouldn’t have to “walk around with their gold” for example, since the modern technology of ATM cards could easily link to a gold collection rather than a paper collection held at a bank. But mainstream economists would still disagree with the economic feasibility. Installing a gold standard now would be hugely deflationary, and if you’ve kept up on news about the modern economy, you’d know that deflation is the last thing we want or need right now. But even if an economy were to overcome the initial deflationary shock, there would still be unnecessary constraints and rigidity. For example, as an economy grows, so should its money stock. But the limitation on the amount of gold, being that it’s produced and moreso, owned, would limit how much the money stock can grow, and thus how much the economy can grow. Moreover, though a gold standard might allow for some long-run price stability (different from growth), the great libertarian economist Anna Schwartz wrote about the ill effects of short-run price volatility that would leave financial companies unable to plan due to the shocks on such things as debt and others. Additionally, a gold standard would place surprise shocks on an economy. Under a gold standard, the economy would experience inflation when production rises and deflation when production falls, despite how the economy is performing apart from the gold production. Mainstream economists all agree that a steady rate of 2% inflation, or, as I prefer, level targeting of some other metric such as NGDP over a gold standard. Lastly, a gold standard would obviously bring to the surface the benefits for countries that own already and still produce gold. China and Australia both produce more than the U.S. and Australia holds the most reserves. This presents a problem since the USD is the world’s reserve currency and also, obviously, US citizen gold bugs might want to check themselves before they go promoting the gold standard.
Allow me to present some empirical evidence as to why I think the gold bull has come to an end, and is ready to reverse course. I’d like to assess the performance of the mining companies. First it’s necessary to understand how a mining company works. It mines the metal at a fixed cost (~$400-600/oz I believe), so as the price of gold rises, the more money they should make. For that reason, they’re considered “leverage upon the price of gold,” and should the price of gold increase, arbitrarily, 20%, the price of the miners collectively should increase >20%. I’ve already detailed that I hate the miners here and my friend Josh Brown has also written about it here. One possible conclusion from the underperformance of the miners, and what I believe currently, is that in addition to what Josh wrote about their business acumen, knowledgeable investors just don’t believe the price of gold will continue soaring. And the penultimate outcome of this gold bull market is the miners dying, as the ultimate outcome being the price of the metal itself falling sharply.
