They filed into the docket, faces bright and smiley despite the shackles around their arms. The leader of the gang, Mr. Gold, was pushed forward into the defendant’s chair. The rest, including Ms. Silver as well as the members of the resource share clan, Biggie Goldshares, Junior Goldshares and Ms. Silvershares, were manhandled onto the hard bench just behind. Rather than looking discomforted at the treatment or the ugly smells and sounds of the crowded courtroom, they just looked around pleasantly, as if on a church-sponsored outing to the local zoo.
Calling the court to order, the bailiff announced that all should rise for the judge. Shortly thereafter, Judge Market entered from stage left, a stern look in his eye. Approaching the dais, he arranged his robes around him and took his seat before gaveling the court to session.
The trial of gold had begun.
“Mr. Gold, you and your cohorts have been accused of misleading investors into thinking that you would help them preserve their wealth, when exactly the opposite has been true of late. How do you plead?”
“Not guilty, Your Honor,” Mr. Gold answered brightly, receiving a dour look in return.
“Mr. Cuomo, you may question the witness,” Judge Market announced impatiently.
As Mr. Gold made himself comfortable in the witness stand, Andrew “Son of” Cuomo, taking a break from his well-oiled political career - I mean, job - as New York attorney general, to serve as the public prosecutor in this high-profile case, rose smoothly to his feet, patted an imaginary loose hair into place, shot his cuffs, and approached the defendant.
“Mr. Gold, behind me in this court are good folks, hard-working folks, who believed in you. Yet you have failed to perform as advertised. How can you sit there, all shiny, and claim that you have not deceived the public in this regard?”
A pleasant and, some might say, radiant smile fixed on his face, Mr. Gold responded in an even voice. “I’m just a simple metal. I’ve never made any claims one way or another, so I don’t know where people got it into their heads that I’m anything special. But for thousands of years now, people have been chasing after me, all over the world. Beats me why.”
“Your Honor, if I may.” The defense attorney, Mr. Reason, rose to his feet.
“Yes?” asked Judge Market, looking grumpy.
“I know it’s a bit unusual, but Mr. Gold is not exaggerating when he says he’s, well, kind of simple. If it pleases the court, it might speed things along if I could ask some expert witnesses to assist in answering the prosecutor’s questions. Can do?”
“Highly irregular,” said the Judge, glancing over at Mr. Gold where he sat, his smile and countenance oddly reassuring in the dark, smelly courtroom. “Mr. Cuomo, any objection?”
Seeing the fond looks in the eyes of many in the courtroom as they stared, fixated, at Mr. Gold, and after a quick consultation with his internal popularity meter and coming to the conclusion that he didn’t want to appear mean-spirited, Cuomo nodded in agreement.
“Thank you,” Mr. Reason said reasonably. “Then I would like to ask the Ghost of Murray Rothbard to join Mr. Gold on the witness stand. “
As the court watched, their collective mouths somewhat agape, Rothbard’s ghost floated softly to the witness stand and landed on the rail next to Mr. Gold, who winked at him amicably.
“Ahh, okay, well…” Mr. Cuomo stammered, looking a little discomforted by the sight of Rothbard’s ghost, his transparent bow tie ruffled slightly by some unfelt celestial wind. “How do you answer the charge against Mr. Gold that he has lured people to him under false pretenses?”
“I’d like to answer by quoting from an excellent book on the topic, the very best, in my opinion,” said Rothbard’s ghost with a wry smile. “It’s called The Mystery of Banking and it is written by… me!” (https://mises.org/story/3122)
In all countries and all civilizations, two commodities have been dominant whenever they were available to compete as moneys with other commodities: gold and silver.
At first, gold and silver were highly prized only for their luster and ornamental value. They were always in great demand. Second, they were always relatively scarce, and hence valuable per unit of weight. And for that reason they were portable as well. They were also divisible, and could be sliced into thin segments without losing their pro rata value. Finally, silver or gold were blended with small amounts of alloy to harden them, and since they did not corrode, they would last almost forever.
Thus, because gold and silver are supremely "moneylike" commodities, they are selected by markets as money if they are available. Proponents of the gold standard do not suffer from a mysterious "gold fetish." They simply recognize that gold has always been selected by the market as money throughout history.
Generally, gold and silver have both been moneys, side-by-side. Since gold has always been far scarcer and also in greater demand than silver, it has always commanded a higher price, and tends to be money in larger transactions, while silver has been used in smaller exchanges. Because of its higher price, gold has often been selected as the unit of account, although this has not always been true. The difficulties of mining gold, which makes its production limited, make its long-term value relatively more stable than silver.
Concluding with a large smile and a wave of the hand, Rothbard’s ghost graciously accepted Mr. Reason’s words of gratitude for taking time out of his schedule to make an appearance, then stood on the rail of the witness box and, with a flourish, took a deep bow before flying out the door to return to his ethereal seat in the heavenly branch of the Austrian School of Economics.
Mr. Cuomo played for a moment with a well-manicured cuticle before whipping around, his finger jabbing in the direction of Mr. Gold. His voice rose dramatically.
“And what, Mr. Gold, do you have to say on the topic of inflation? Can you deny that you and your friends claim to be inflation hedges? If so, then how do you answer to the fact that you are now selling for a lower nominal price than back in 1980! And, in inflation-adjusted terms, you are well behind! You, sir, are a fraud!”
Mr. Gold’s smile remained unchanged, his countenance pleasant as always. “I’m sorry, but I really don’t understand what you are talking about.”
Mr. Reason again took to his feet. “Mr. Cuomo, if I may?”
“Oh, alright. Have at it.”
“The defense calls Terry Coxon of The Casey Report. Mr. Coxon, would you be so kind to answer Mr. Cuomo’s question.”
Coxon made his way from a seat at the back of the courtroom where he had been enjoying the show and walked over to stand next to the witness box. Unable to help himself, he reached out and gave Mr. Gold a pat on the arm.
“So, Mr. Coxon,” Son-of-Cuomo barked, “How do you explain that in 1980, gold touched $850. And here, 28 years later, it is trading for less than that – even though inflation has been persistent throughout the period. The claim that gold is an inflation hedge is simply false!”
Speaking slowly, to be sure that Mr. Cuomo understood, Coxon replied…
What moves gold isn't the rate of inflation but the change in the rate of inflation.
When people expect higher inflation, they bid up gold. When people expect lower inflation, demand for gold drops, even though "lower" may still be very high. That's why gold trended down in the 1980s, even though the inflation rate was high. The inflation rate was high, but it was declining.
There is a simple reason for this relationship. Gold and the dollar are both a store of value. Gold is more reliable in the long run, and the dollar is more reliable over shorter periods. Because they do somewhat the same thing for their owners, they are competing products, but with different attributes.
For example, the cost of holding dollars for their usefulness as a store of value is the gradual erosion of purchasing power -- price inflation. In a period of rising inflation, using dollars for storing value becomes relatively more expensive than using gold. So the demand for gold increases. And since the supply of gold – in ounces – is nearly fixed, the price per ounce goes up.
To sum it up, the price of gold is lower today than in 1980 because the rate of inflation now is lower -- much lower -- than in 1980.
Judge Market looked thoughtfully at Mr. Gold. “Mr. Cuomo, any more questions for this witness?”
“Not at this time, Your Honor,” Cuomo said, flicking an imaginary piece of dust off the sleeve of his silk suit as Coxon returned to his seat and the bag of popcorn he had left there.
“But I do have a question for you!” he said, with a glare at Mr. Gold. “You sit there so calm, nonchalant, even. The public looks to you to remain a bastion of stability in challenging times. But as the financial crisis has swept over the land, you have been gyrating wildly. I accuse you of luring in investors by pretending to be calm, but in actual fact being dangerously volatile!”
Mr. Gold smiled and shrugged. Again, Mr. Reason took to his pins.
“I’d like to call Jeff Clark, editor of Big Gold. I believe he has some charts that might help in answering that charge. Mr. Clark.”
His step enthusiastic, Clark walked briskly up to the bailiff and handed him two charts, which were, in turn, dutifully walked up to Judge Market.
“We’ll call these exhibits A and B,” said Judge Market, pulling on a pair of tortoise shell specs for a closer look.
From the wings, an overhead projector was presented and Clark walked over to it, flipped it on, and laid flat a transparency. Helpfully, the bailiff lowered the lights a touch.
“I think gold has gotten a bum rap,” Clark began, his face aglow from the light of the projector and, perhaps, his passion for the subject at hand.
“In fact, despite recent weakness, between January 1, 2007 and October 10, 2008, when I prepared this chart, gold is up 42.6% while the bellwether S&P 500 is down 36.9%.
“For my second chart, I’d like to address the notion that gold is more volatile than stocks,” Clark said, sliding exhibit A from the projector and replacing it with exhibit B.
Mr. Cuomo, thinking about the whupping his own portfolio of Wall Street darlings had taken of late, turned to Jeff Clark and almost spat out, “Since we’re on the topic of stocks, let’s talk about the big gold stocks. They were supposed to do better than the physical metals, but they have been hammered just as hard or even harder than many other stock sectors!”
In the back of the room, Biggie Goldshares examined his shoes, while Clark cleared his throat and said…
No stock has escaped undamaged in the global carnage, including gold stocks. The down-drafts have been breathtaking, and it’s easy to imagine that gold stocks will just keep falling. Here’s what happened...
For starters, hedge funds continued deleveraging, which can cause significant moves in market prices due to their use of margin. Withdrawals in U.S. hedge funds hit $43 billion in September alone. Meanwhile, mutual funds and "basket of commodities" ETFs continued selling off due to disappointed, or frightened, investors. This means the good was sold along with the bad. Add in the intensifying fear in the marketplace and few buyers were to be found.
Second, as the sea of red numbers continued splashing across headline news, investors fled in droves. Many simply didn’t want to be the last one out of what they believed was a burning building, so “Dump everything!” was the mantra. Many stocks, in a perverse use of logic, were sold because they had value. Lots of investors simply fled to cash, which is where investors reflexively go when they see a market rout.
Lastly, right or wrong, gold stocks are perceived by some as riskier than your average IBM (NYSE: IBM, Stock Forum) or GE (NYSE: GE, Stock Forum). Further, few gold stocks pay dividends, and the ones that do only yield 1-2%. Some sellers might have stuck around if they were getting 8-10%.
So, is that it for gold stocks? Look at the reasons outlined above: Where does it say investors sold because inflation is dead? Where does it say the public left because the government has promised not to print money to solve their problems? Where does it indicate gold is no longer viewed as a safe haven? Has mankind lost interest in war? Does the dollar’s recent rise mean its ills have been cured? Banks are fine? The economy has a bright future?
The bottom line: The base case for gold stocks remains intact, because at some point the public will see them as the place to go for profit. Gold will rise, and regardless of what the general market is doing at the time, gold stocks will separate and follow gold up. The best days for gold stocks still lie ahead, because a much higher gold price is assured by all the recent efforts to stave off a recession. Since gold stocks were pulled down by a general market panic and for reasons unrelated to fundamentals, our advice is to hold on. We’re confident their day will come. And we’ll sell when the problems that have yet to push gold to new inflation-adjusted highs have all played out. In the meantime, we need to be steady while others are fearful.
From the back of the room, a hand shot up. Judge Market, already resolved that this was to be no ordinary proceedings, looked over his glasses at the owner of the hand.
“Yes? And who are you? And why are you interrupting?”
“Louis James, senior editor of the International Speculator,” the mysterious stranger spoke up loudly for the courtroom to hear. “I would like to add a historical fact related to gold stocks in a crisis.”
“Mr. Cuomo, any objection?”
In reply, Son-of-Cuomo simply shrugged and dropped into his seat.
“Go ahead, Mr. James,” Judge Market said, rocking back in his chair, his eyes attentive.
Approaching the witness stand, James turned to the assemblage and proceeded.
TOMORROW: Stay tuned for “The trial of gold, part 2,” appearing Thursday on Stockhouse.
Read more Stockhouse articles by David Galland.