Popular Culture 20110114: Gold

This is designed to be a companion piece to a new Pique the Geek installment of the same title that will be published Sunday.  The idea for this dual treatment of gold was inspired by our good friend and supporter from the other two sites to which I contribute, ek hornbeck.

This half of the couple has to do with gold in a nontechnical sense.  The one on Sunday gets, obviously, much more Geeky.  However, technical uses aside, gold has been part of the popular culture since prehistory.  Only recently have truly technical uses for gold been found, and those will be covered elsewhere.

Tonight we shall look at some of the history of gold in popular culture, and finish with a discussion of the so-called gold standard and the numerous sales pitches that dominate the conservative airwaves.  We shall try not to get too Geeky.

Gold is one of the few metallic elements to be found in a relatively pure state in nature.  Others include mercury, copper, silver, the platinum metals, and, oddly, iron.  I use the term “relatively” because none of these metals are ever found in a state of complete (over 99.9%) purity in nature.  Iron is the oddball because it is so reactive that metallic iron found on earth is always of meteoric origin, usually associated with quite a bit of nickel.

The metals mentioned are found native, i.e., as metals and not combined in ores because they are relatively nonreactive.  Copper, the most reactive of them, is relatively uncommon, but nice specimens have been found around the world, notably in the Great Lakes region.  Mercury is found native as a fine dispersion in some of extremely rich mercury sulfide ores, particularly in Spain.  The platinum metals are found native in many places, notably the Ural region in Russia.  Gold and silver are found native all around the world, but silver is often found as chemical compounds with other elements.  Apart from the platinum materials, gold is the only one to be found almost always native, but also almost always alloyed with a greater or lesser amount of silver.  Gold is also sometimes found chemically bonded with tellurium or selenium.

One of the reasons that gold is popular is that it is a pretty, shiny thing.  We humans have an affinity for pretty, shiny things and that dates from prehistory.  It also does not tarnish, keeping it pretty and shiny, whilst most of the others (the platinum group being exceptions) do to a greater or lesser extent, depending on the environment.  Another reason that gold is popular is that it is comparatively rare.  Note that I have yet to use the term “valuable” with respect to gold.  We shall get into that later.  Yet another reason is that it is very, very heavy, and something about human nature prefers, volume for volume, things that are heavier than other things.  Gold is just shy of being 20 times (not a typo) heavier than an equal volume of water.  Thus, a measuring cup of water that weighs about eight ounces avoirdupois would weigh nearly 160 ounces avoirdupois (10 POUNDS!) filled with gold.  You got that right!

To be technically accurate, and this is as Geeky as I will get in this piece, gold is measured in ounces troy.  An avoirdupois ounce is about 28.35 grams, and an ounce troy is 31.1 grams.  However, an avoirdupois pound is 16 ounces but a pound troy is only 12, so a pound avoirdupois is heavier than a pound troy, even though troy ounces are bigger.  That is why I specified the measuring system in the paragraph above.

Anyway, gold has always been attractive to humans MOSTLY because it is pretty, shiny, rare, and nonchanging.  Thus, it highly valued even though there was not much to do with it other than make pretty, shiny decorations.  That was pretty much all for which it was used for millenia.  Since it was rare, only the wealthy (unless one was lucky enough to find some) could have very much of it, and because it was pretty and shiny, the wealthy (who already had all the food and other necessities that they needed) would trade necessities for gold.  This is just human nature, our fascination about pretty, shiny things.  I keep making this point because it is important.

All of the early civilizations treasured gold, because it became a symbol of wealth.  That is another human nature foible, the need to accumulate wealth far beyond what is needed to provide for the needs of one’s self and one’s family.  Gold started to become sort of reservoir of wealth before the written word, and by the time that the Egyptians became a big deal, gold was becoming sort of a medium of exchange, but it was later before it became really big.  The pharaohs liked to use it because of its stability for funerary vessels and decorations (they also liked glass, what we now would call costume jewelery) for the same reason.  Pretty and shiny, glass was rare for a long time, most of it being of meteoric origin for the Old Kingdom at least.  Goodness, this is still pretty Geeky!

In any event, someone finally thought of taking gold and making standard (insofar as they could do then) pieces of it to use for trade.  The transition from what had been mostly a decorative material to a medium of exchange took centuries, but finally became the norm.  Silver was also being used for the same thing, at roughly the same time.  However, it never held the mystique of gold, since it was white.  The color of gold has a lot to do with its mystique.  However, silver was used much more widely and for a much longer time as a medium of exchange than gold was.

After a while, the chunks of gold of roughly the same weight just would not do, because it is easy to blend much cheaper metals with it to make it go further.  It turns out that if you blend some silver and copper with it, in the right proportions, the color is just the same as pure gold.  Our modern 18, 14, 12, and 10 karat gold consist of gold blended with various amounts of copper and silver, but still look like “real” gold.  Because of the possibility for this, people who would accept gold as a medium of exchange began to ask for some sort of assurance that they were getting the real thing.

Thus was the genesis of making coins.  Stripped to the essence, a coin is nothing more than a chunk of (usually) metal that is impressed with some sort of symbol that guarantees its content.  The first ones were very crude, just a hammered out piece that was struck with some sort of stamp that indicated authenticity.  Some coins were more trustworthy than others, and soon it was found that the imprint could be copied onto chunks of baser metals, the profit going to the person who made the change.  Thus, counterfeiting was invented.  It never ceases to amaze me to what lengths humans will go wherein to deceive others for profit.  As an aside, the Maya in Central America used cacao beans as a medium of exchange.  It was not unknown for unscrupulous  persons to peel the skin from the bean carefully and remove the valuable bean, replace it with a soft fired clay replica, placing the skin on the clay.

Because of counterfeiting, coins became more intricate in design, and the most valued ones were difficult to duplicate.  By about 600 or 700 BCE pieces that we would recognize as coins were being produced, although we would all say that they were crude by our standards.  However, the principle is exactly the same:  by guaranteeing that a coin was from a particular place and that it had a standard metal content, its value was set.  Remember, most coins were silver, not gold.

This went on for millenia, and still continues.  Modern coins are extremely detailed, even ones of base metals.  By the way, the reeding (the ridges on the edges of US dimes, quarters, and half dollars) was introduced centuries ago to prevent shaving (also called clipping) of the edges of precious metal coins.  With no reeding, it is not possible to determine if someone has used a keen knife to shave a little gold or silver from the coin.

Reeding is not is not important in this modern era of token coins insofar as preventing shaving, but it does serve an unanticipated purpose of allowing visually impaired people to distinguish coins of similar size from one another.  Modern Euro coins have complex edge designs for what has evolved to just this purpose, and that is a good thing.

This brief history of coinage does not address the central fallacy, however.  That fallacy is that gold really has true value.  With the exceptions mentioned on the sister article to appear Sunday in Pique the Geek (same bat time, same bat place), it actually does not.  It is not good to eat.  It is not good for building things, since it is too soft and too rare.  It is not good for very much, actually, except to be a pretty, shiny thing!  To this day, it is claimed that gold has intrinsic value, that is, it is valuable just because it is valuable.  Bunk!

Land has intrinsic value.  You can build a house on it.  You can grow food on it.  Water has intrinsic value.  You can (and must) drink it, you can water crops with it, and you can use it for millions of other uses.  Food has intrinsic value.  You can (and must) eat it.  Air has intrinsic value.  My thesis is that intrinsic value is quite misunderstood, and gold, except for my Geeky development Sunday, just does not qualify.

So why is gold selling for around $1400 per ounce troy?  Darned if I know.  Try growing food on it, or building a shelter on or out of it, or watering crops with it, or breathing it.  It is no good for any of those things.  I really believe that because of our perverse human attraction for pretty, shiny things (and our desire to accumulate wealth) that gold has become very artificially valued, when it is really pretty worthless.  Millenia of transferring our concept of value to this pretty, shiny thing has made us unaware that is really just another element.  Gold is not even required for the metabolism of any know lifeform!

Now, there is some more recent history that has to do with the value of gold, and it was actually at the core of the monetary policy of the early United States.  Gold actually fell out of favor in the late days of the Roman Empire because they had debased their coins with copper and lead to such an extent that barter was becoming more popular.  Besides, a mentioned earlier, silver was much more commonly used for coins.  In my opinion, a major reason for the fall of the Empire was inflation of their currency, and Gibbons sort of agrees with me in this one, but for other reasons.

Gold was still used, to be sure, but after the fall of the Empire it once again became something more for the wealthy (feudal lords and such), whist the common folks were more interested in food, shelter, and water.  Only when the Renaissance started to come into being did gold as a common medium of exchange become important again.  Once again, our human attraction to pretty, shiny things is the reason.

Because of improvements in the technologies of metallurgy and striking coins, gold became a more common medium of exchange in the period around the 14th and 15th centuries, but silver was still much used.  Because of better assay methods, one could take a gold coin from, say, Italy, and compare its gold content with one of say, Spain.  Before long, all coinage was reducible to the actual mass of gold in a coin, regardless of impurities.  That led to what we now call the gold standard, meaning that international trade was based on the content of the pretty, shiny metal once again.  However, most money systems were still based on silver, not on gold.

As a matter of fact, the gold standard was not adopted anywhere until 1821, when Great Britain adopted it.  Wingnut types that advocate “returning” the United States do not realize that the US did not adopt the gold standard until 1873!  The US went off of the gold standard iin 1890, then back on it in 1900.  During World War I essentially all countries abandoned the gold standard, but gradually came back to it after the war.  In 1933 President Roosevelt by executive order essentially took the United States off of the gold standard because of the severe economic conditions during the Great Depression.  As a matter of fact, the gold standard is held by some economists to be a major contributing factor to the Depression.

That Executive Order also made it illegal for US citizens to own gold except for jewelery, dental work, and coins of “historic or numismatic” significance.  If you were a gold panner, you were required by law to sell your gold only to the government, for a price fixed by the Treasury Department.  As a matter of fact, Gerald Ford signed the law that once allowed US citizens to own gold in any form.

So, the United States has been on the gold standard for only about 44 years of its over 230 years of existence.  So do not let the wingnuts tell you that returning to the gold standard would be a panacea for our monetary policy.  If it worked, we would still be on it.

The United States actually was on a bimetallic standard for most of its history.  Gold and silver were both recognized as being money, at relative values defined by law.  Originally it was 15:1, but this artificial peg caused untold problems, mainly driving out all newly coined gold of the United States because when world relative value of the two metals caused gold to be relatively more, foreign silver was brought in by speculators who could make money by buying gold with silver, then taking the gold to Europe where it was more silver than it was in the US.

The Executive Order outlawing private ownership of gold was patently unconstitutional, but was never reversed by the courts.  FDR issued that order to prevent complete economic collapse, because he and his advisers already knew that there were more dollars in the money supply than could have possibly been backed by gold using the gold standard.  He used the crisis of the Depression to remove all gold from circulation to prevent an even bigger catastrophe.

That catastrophe would have been the realization that the gold standard was just an illusion.  We know that now, but in 1933 people still thought that pretty, shiny things actually had value.  Everyone in power believed that gold was somehow special, so FDR, by his order, kept that fantasy alive.  At the time, it was probably the right thing to do, but it just delayed the acceptance that actual production of goods and services, and not how much pretty, shiny things that a nation had, defined an economy.

Fast forward to the recent past.  When I was a child, it was still illegal to own gold, except for the exemptions mentioned before.  Then things got a bit more loose.  When I was a big kid, the value of gold was defined legally as $35.00 per ounce troy, and then laws and regulations started to loosen up the market.  It went up to $42, and then higher and higher.  But it was still not really legal to own until Ford signed the law.

There is something wrong with a model wherein the value of currency is backed by an essentially useless, pretty, shiny thing.  So what is better?

For many years, the manufacturing capacity of the United States backed the dollar.  This is not the case so much now.  We still make things, but we most often license our US based corporations to manufacture them overseas.  This is patently evil, and I will post another idea about that soon.

Whilst we are talking about the gold standard, it might be interesting to get an idea of how much gold there is.  So far, a little over 5 billion ounces troy have been mined.  That sounds like a lot, but it is not.  This comes to around 156 billion grams.  With a density of 19.3, that comes to 8 million litres, 8 thousand cubic meters.  This works out to a cube about 66 feet to a side.  There are barns bigger that that!

Assuming a spot price of $1400 per ounce troy, the value of this gold would come to seven trillion dollars.  The 2010 GDP of the United States was about 14.5 trillion dollars.  Thus, all of the gold ever mined is only enough for about two years’ worth of the US GDP.  That can not be reconciled with a useful gold standard.  By the way, at the last price of gold dictated by law before Ford removed the restrictions, ($42 per ounce troy), all the gold ever mined would have been worth only $210 billion.  The gold standard is completely incompatible with modern industrial economies.

In the old days, the wealth of nations depended on how much gold they could mine or plunder.  That is why Spain was such a huge power after they stole all of the gold and silver from the peoples of the Americas.  We talk about the gold in Fort Knox, and it is a matter of public record that it comes to  147.4 million ounces troy.  At $1400 per ounce, the value of the gold there is 206 billion dollars, a spit in the bucket in terms of the size of the economy.  The Department of Defense alone is going to spend around $750 billion this fiscal year, so it would take over three and a half Fort Knoxes to finance DoD alone, for one year!

I believe that we have driven the stake through the heart of them myth about the gold standard.  Now, why does everyone want it?  I still do not know.  I do know that only 10% of annual production of gold is actually used for things other than jewelery and investments.  Why is it of value?  I can think of NO other material that is produced that 90% is just to look at or to keep around.  Almost all silver is used industrially, with very, very little used as an investment or as jewelery on a percentage of production basis.  The same can be said of the platinum group metals.  We actually do things with them!  Thus they really have intrinsic value.

Why on earth would something have value if 90% of it is put into nonproductive uses merely because it is a pretty, shiny thing?  That is what baffles me.

If you ever watch the FOX “News” Network or listen to wingnut talk radio, you are inundated by adverts for gold.  A convicted felon reads the advert copy for one firm, a “B” list actor for another, and various and sundry more anonymous people for others.  I promise you that these firms are not giving away this gold.  I also know that some of these firms, or at least some that used to market gold, are or were crooked.  As a matter of fact, the firm that advertised for a long time on the second most listened to talk show host now is out of business and its chief is in the jailhouse for fraud.

Buying gold for investment purposes has long been fraught with risk, and is still.  Back when gold was in circulation as currency, it was without risk since it was backed by the full faith and credit of responsible governments.  Now it is a wild west situation, and even the US Mint is in on the act.  You can buy gold coins directly from the Mint in certain cases, and the Mint also has deals with large distributors for most of their coins.  When you deal directly with the Mint, at least you can trust the dealer.  Some of these other outfits, not so sure.

Assuming that one buys gold from an honest dealer, here are some to the disadvantages.  (All of these figures are based on a 10% fee to the dealer on both sales and purchases.  Some dealers have lower fees (most do not), and many have much higher fees):

* Markup and Discount.  Let us say that you buy gold for the daily spot price, plus the dealer markup.  Let us say that the spot price is $1400 per ounce troy, the dealer takes a 10% markup (low), and you buy one ounce.  This costs you $1540 for something worth $1400.  Now, say you for some reason have to sell it the same day, before it could have appreciated (if it does).  You go back to the dealer and sell it back, for the daily spot price less 10%.  Now the dealer gives you $1260 for something worth $1400, and that you just paid $1540 to buy.  Your net:  a $280 loss.  But it gets worse.

Let us say that your $1400 worth of gold (that cost you $1540) rises on the market, and that it gains 10% for a spot price of $1540.  Now you sell it for $1386 ($1540 less 10%)!  OK< let us say that it gains 20% on the market, for a spot price of $1688.  You sell it for 10% off spot price, for $1519.  In the first case, you lose $154, and in the second case you lose $21.  You STILL lose money even though the spot price went up 20%!

If you were to buy a stock at a major, low fee mutual funds company like the one that I have used, your trades would be a flat fee for the purchase and for the trade, typically $25 or under for trades the size that a regular person might make.  Suppose that you bought $1400 worth of stock with a $25 transaction fee, it gained 10%, and you sold it with a $25 fee.  Your $1400 worth of stock costs you $1425 after the fee.  You sell the stock, now worth $1540, and pay a fee of $25, netting $1515.  You just made $90 on these transactions, even after the fees.

Unless you are paying next to nothing in markup and receiving next to nothing in discount when you trade gold, it is HARD to make money with gold, unless you are the dealer.  The dealer always does well.

* Market fluctuation.  In our examples just above, we assumed that gold was increasing in spot price.  That is not always the case.  Here is a horror story for you.  In the late 1970s the Hunt brothers tried to corner the silver market.  Because of the fact that they are both precious metals, the attempt to corner the silver market also caused gold to spike.  Gold reached $850 in early 1980.  But you say, Doc, it is $1400 now!  True, but this is 30 years later!  Sort of a long term investment!  As a matter of fact, gold did not reach $850 again until 2007!  But this is only a part of the story.  The dollars that I just were current dollars, that is, the dollars for the year of the prices.  You really have to look at inflation adjusted dollars.

When you use dollars adjusted for inflation (2009 dollars are the latest ones that I have), the cost of gold in 1980 in 2009 dollars was $2359!  If you had bought gold in 1980, at its peak, today, in 2009 dollars your ounce would be worth $1400, for a market fluctuation amounting to a $959 loss in inflation adjusted dollars.  Thus, you would still be way, way behind in real terms!

This is the worst case, but even recently gold has dipped.  For example, in 2008 gold peaked at a little over $1000 in 2009 dollars.  In 2009 it had dropped to just over $700 in 2009 dollars.  Gold is a roller coaster!

Is gold always a bad investment?  Maybe not.  In 1998 I bought an ounce for $302 1998 dollars (just about $400 in 2009 dollars).  It is now worth $1400 2009 dollars, so I did OK.  I wish that I had bought many ounces then, but there is no way to tell how the market will turn.  I was just lucky because that was near the low in the spot price for gold for the fairly recent past.  I would be extremely hesitant to buy gold at $1400, though.  Here is why.

If we ignore the market aberration caused by the Hunt brothers in 1980, the highest that gold has been in 2009 dollars since 1960 was about $950 in 1988.  At $1400, gold is more expensive than it has EVER been (again, leaving out the Hunt brothers caper).  In general, it is not usually a good idea to buy when things are higher than they have ever been.  It seems to me that this is even worse in the case of gold, which as we have discussed has few real industrial uses, but rather gets most of its value from being a pretty, shiny thing.

Besides, when people like G. Gordon Liddy are hawking something, I do a double take.  When these products are advertised on the most radical right wing radio talk shows and on the FOX “News” network, I also do a double take, especially when very few other advertising outlets carry the adverts.  It is similar to the solar “power plant” that I debunked several weeks ago on Pique the Geek several weeks ago, lots of promise and little actual value.  One has to remember two things, and this is just my opinion, but I think that I am correct.

The ultra right noise machine makes its living, in large part, by preying on the least noble instincts of people.  One of these instincts is fear, and these gold adverts are rife with fearful imagery.  For example, the one with the “B” list actor shows a violet, dark sea in the background and the actor reads words to the effect that you get only one chance to secure your finances, and that gold is the only chance.  The current one with the convicted felon has balloons that he deflates, telling us that the US dollar is “…just a bunch of hot air…”.  The latter one is downright unpatriotic as well, in my opinion.

This is getting very long, but I hope that it is interesting.  I shall make one final observation.

If you like the idea of precious metals as part of an investment strategy, gold is probably the worst to utilize.  Silver is a much better choice, but not right now.  Near $30 per ounce troy, silver is also higher than it has ever been.  But if and when it comes down to $15 or less in current dollars, it might be OK.  The thing about silver is that most of it is actually used to make things, only a small amount held because it is a pretty, shiny thing.  In other words, only a relatively small amount of silver is retained after refining, but is rather used in such a manner that it is not recoverable.  Remember, 90% of gold production is retained in easily recoverable forms, jewelery and bullion.  Most silver is lost.  But now is not the time to buy silver.  Also, the same risks apply to silver as do to gold.

Thank you for reading this tiresomely long post.  I would be interested in any thoughts that you have in the comments section.

Warmest regards,

Doc

Crossposted at Docudharma.com and at Dailykos.com