Gold: An objective look at subjective value

Edited remarks from a speech given by Tony Deden at the annual meeting of the Spanish Precious Metals Association (AEMP) in Madrid on 25 November 2010. Also available in PDF.

Ladies and Gentlemen,

Gold is no longer the four-letter dirty word of years past. People see it with a mixture of unbelief, curiosity, greed and emotional animation. Yet, despite its five-fold increase in price in a decade, not to speak of the amount of press it has received, it is, in my view, largely misunderstood by most observers and participants alike.

Those who own gold are often torn as to when to sell it to capture the unrealized profit. Those who do not own it, agonize on whether they should buy it at this price, or when they should buy and what they should pay for it. The problem is that the value of gold does not neatly fit within the customary valuation models of our day. This is part of the reason for the cynicism it has attracted.

Agnostic as I may be about the price of gold, and unable to prognosticate or give you hints of advice about whether you should own some or not, I propose to share my own subjective views on its meaning.

The rising price for gold (and silver for that matter), is not the answer to any of the ills that burden our world, but only a symbol of the flight from dishonesty. Such symbolism possesses important clues with respect to capital and its role in economic life.

There is no argument in that we live in dismal times. The subprime crisis was merely the prelude of the financial chaos that has ensued. Yet, it is not the consequences of such financial crises that matter as much as the recognition that we are suffering from a deeply-rooted moral crisis.
The subject may be scholarly but its impact affects us all. I point you (again) to Guido Hülsmann’s The Ethics of Money Production as a primer on the genesis of our global ailment.

From a capital owner’s perspective, this moral crisis has considerable implications since its economic consequences arise from a larger framework of structural malaise. Four such characteristics are pertinent: fraud, illiteracy, lawlessness and poverty.

Fraud defines every aspect of our modern life. From government to finance, to family, to accounting, law, medicine, to the church and from the highest officials in the land to the lowliest day-labourer, fraud characterizes our human interactions today more than
in other periods in history. Madoff’s fraud pales into insignificance when viewed against the intellectual fraud that causes far greater damage. But we seem to accept it. Fraud is tolerated, expected and in fact, generally rewarded. In contrast, trust, that human condition that binds families, communities and builds societies, has just about vanished.

Illiteracy is also a trait of our age. Even at a time of portable computers, instant communication, fancy cell phones and the miracle of the internet, and even when surrounded with more information than any of our ancestors ever dreamed of, we as a society remain in utter darkness. Compared to our ancestors, we are intellectually bereft. We know nothing of our own history, of money or capital. We see money and credit as the source of wealth. We embrace financial engineering while being uninterested in or ignorant about its economic impact. We embrace the idea of wealth with-out work and even demand it. We buy other people’s debts and we call them assets. We demand real goods and plentiful credit to pay for them. We look at rising asset prices and reckon them to be wealth. We vote idiots into high office. We hail economic growth, as measured by GDP and by the clipped coins of our times, and hail it as progress. We are a society of idiots.

Even more so, lawlessness is the third characteristic. The law has become distorted, ambiguous, uncertain and subject to the whim of the ruling elites. In the name of security or by reason of the abominable idea of social justice, the sanctity of property, the sanctity of contract and the rule of law have been seized.

And finally, poverty. We have an abundance of money and credit but a shortage of capital. We have sought to substitute form over substance, credit over savings and consumption over production. We have eaten our capital. As a result, both current and subsequent generations will fail to match their parents’ economic standing.

Yes, we live in dismal times and we suffer from a moral crisis, both being consequences of a 40-year old experiment in dishonest money.

Again, from the perspective of a capital owner⎯us, the issues are daunting and very real.

Dishonest money not only destroys capital, the saver and the economic calculation of entrepreneurs. It chiefly destroys the soul of a society. It begets a dishonest under-standing of risk which begets dishonest accounting, dishonest objectives, dishonest business endeavours, dishonest securities, a dishonest financial system and ultimately, a dishonest managerial class.
Under these circumstances, I propose to you that the idea of finding value or of valuing assets becomes unimaginably difficult. The use of standard metrics in valuation is fraught with falsehood. And so, the notion of value becomes polysemantic and detached from the orthodoxy of modern finance.

If we are to address honestly the financial implications our moral crisis, we must begin to think differently. To say that we wish to preserve our capital is, at best, very difficult. It requires that we find honesty and permanence. It requires that we extract ourselves from the very system to which we are tethered, and that we look at capital very differently. It requires that we become utterly distrustful. It demands that we think outside of the metrics used by our contemporaries and outside the jargon of finance that is used to sustain the ignorance and stupidity of our times.
If you insist on asking how high the price of gold might go or whether you should buy or sell, my only answer is that you have the wrong question. The price of gold in money cannot be calculated with the formulas of financial analysis. What is the price of something when measuring it with something whose quantity is purposefully dishonest?

Mr. Bernanke is wilfully trying to debase the dollar. He will succeed. His colleagues at the ECB purport to be against such measures. This will not last long for they, too, will resort to coin clipping. They too will fail. Today is Greece and Ireland. Tomorrow is Spain. Next month is Britain, France and a host of others. The following month is China, Japan, America and so forth. It may take years but the whole culture of credit and debt will fail. This is reality. We just do not know how or when.

In the end, the consequences of monetary folly have not been addressed but only postponed. The errors have not been cleared but merely covered up with money and false accounting. Money printing can buy time but not wealth. All roads lead to default and impoverishment of some sort. The only question that remains is what road will be taken.

The relevance of gold is not in its price but in its ownership. This is precisely important for those who wish to make a profit from gold by purchasing certificates, ETFs and the like. Participating in a price movement is not the same as owning an asset. Owning a piece of paper and thinking you own gold is no different to a farmer who insists to being in the dairy business by owning cattle futures.

As I said earlier, gold is not a drug that cures the disease but merely a symbol of the flight from dishonesty ⎯a symbol of independence, honest money and permanence. We value it subjectively and we ought to be concerned with the motivation of its ownership more so than that of its price. The same must be the case for our general pre-disposition to our capital pool. Our investment portfolio should not be a function of the last bid on some stock exchange. It should not be merely promises or claims on uncertain events. It should be tangible and have economic value. It should not be hope, illusion or euphoria. Our purpose in the ownership of assets should not be that of making money but simply the very ownership in tangible and economic goods in itself. That is the essence of wealth.

Far more importantly than financial calculation, the judgement that is necessary in any honest investment practice presupposes, in my view, a thorough understanding of economics, history and a sense of substance. Economics gives us tools with which to think. History gives us a sense of perspective, and the focus on substance is but a moat to separate us from our own folly.
Economics, the classical and honest variety, is vital when reflecting on money, credit, banking, saving, investment, entrepreneurship and a host of other topics. At the minimum and for no other reason, having a modicum of literacy in economics helps us to avoid being fooled by economists.

A sense of history is indispensable.

History shows us with unmistakable clarity all of man’s folly throughout time. It is dotted with the failure of experiments in economics, money printing and man’s desire to consume without first producing.

We may think of ourselves as being more sophisticated, but we end up making the same errors our forefathers did, albeit with greater gusto and efficiency.

Having a sense of history reinforces the theory of such sapient observers such as Ludwig von Mises who wrote in 1949: “Money and credit growth can never make a nation prosperous. It may bring about a shift in income and wealth from some groups to other groups, but it inevitably tends to impair the prosperity of the whole nation.”

History is a record of man’s failure to understand the difference between money and capital. He seeks the former while all the while he needs the latter. Thus, understanding history helps us avoid our fellow man’s inescapable habit of putting his fingers on a hot stove.

And finally, our focus on substance sets us apart.

Dishonest money has created a culture of speculation out of ordinary producers and savers. As a result, we confuse financial markets for the source of wealth. Our time preference has been altered so that we seek returns incompatible with the real risks we take. We focus on market activity rather than on the substance that it fails to imply.

Substance is something that is real. It does not necessarily have to be tangible, but that would be preferable. Whether it is in gold⎯a form of money⎯or honest entrepreneurship, substance is rooted in economic reality. And so, understanding sub-stance, whether it is in money or in entrepreneurial and wealth creating activity, is the most important practical skill we must acquire.
Indeed, the price of gold in money may increase. It may also decrease. When do you sell it? You ought to first decide why you own it. But even then, let me ask: “What sort of substance will you acquire with the proceeds from the sale?”

One of the greatest lessons in classical economics is that value is subjective. It is subjective to the aims and criteria and judgement of the person doing the valuing. And frankly, in our dishonest world, such subjective value is the cornerstone to what kind of capital you are likely to command in the future.

I trust that I have given you some objective arguments to help with your subjective assessment of such value.

Thank you.