Courtesy of CIGA Pedro
Dear CIGAs,
A popular argument against the utility of Gold at times of crisis is regularly offered up through the rather facile statement that it can’t be eaten. This is then given as reason why, in times of great crisis Gold will not “perform” the way food stocks and other inferior alternatives will. Even the Financial Times’ excellent journalist, Gillian Tett recently sang this refrain. It’s becoming a tiresome argument, and it needs to be deconstructed.
It is welcome that people are beginning to see the dichotomy between paper and hard assets. The predominant paper asset is (un-backed, fiat) currency. Hard assets, of course, are many and varied.
But if people believe that wealth preservation can be reduced to a simple juxtaposition between paper representations of wealth and tangible wealth, they are misguided. That is only a partial explanation. There are other issues. One of them is the issue of portability.
In times of economic disaster you can stock-pile food, yes, but what happens if you have to abandon your dwelling due to security issues. What happens if your “home garden” and livestock have to be defended? It is not a nice thought. In preparation for possible dislocations it is unwise to think that you may be able to remain in one place. This is one of the undervalued aspects of Gold. You can pack it up in a small case. Your wealth is mobile. At today’s prices, half a million (USD equivalent) is easily portable. In a years’ time a million or two may be just as easy to cart off in your hand. Things like paintings (especially miniatures) and gems perform a similar function. During a serious crisis like social-breakdown or war, it is not reasonable to assume you will be able to take all of your canned goods, water-filters, generators et al with you, in a vehicle that needs constant refuelling and repair… you’re going to have to be lean, mean and fast on your “feet”. Not weighed down by encumbrances. Ever wonder why people escaping Nazi Germany chose diamonds? Maximum wealth with smallest possible mass and weight. Quite simply, these “you can’t eat Gold” theories, that supposedly undercut Gold’s value, do not hold water.
When people live in crisis situations, one usually finds not that goods aren’t available – but that they are expensive. Fantastic food, caviar champagne and other “accoutrements” were available all over the Soviet Union (Mostly in hard-currency “bereoska”); a bottle of whiskey could even be found in remote American barracks during World War II – but the price, then, depending on location, was about a crisp $100 bill. (Then! … Not now.) Hoarding resets prices when demand goes up and supply crashes. Gold, a hoarded, not consumed, vehicle, performs perfectly in an environment when sought after goods are being restricted from the market and more so if paper currencies are under attack.
Let’s take the consumable issue one step further. If you buy a one lot of European barge delivered (ARA) gasoil, you can, theoretically, take delivery. But how, exactly does a non-configured layman deal with that reality? With great difficulty is the answer. Leaving aside the configuration issues of delivery (which are significant if you’re not a professional oil product transport or storage entity), are you going to transfer it and then store it on your own while meeting legal safety and environmental requirements so that you don’t (literally) blow up the neighbourhood? That’s unlikely. Your parcel will likely become distressed and no one is going to even pick up the telephone to talk to you about how to get rid of your 100 tons of gasoil. Moreover, the owner of the much larger parcel your piece is consigned within will demand that you meet all sorts of other regulations to siphon off your little piece. (Doesn’t this sound a little like sawing off your corner of that 400oz. London Good Delivery bar you were told by some Gold pool was “yours”?). It’s no different in coffee, cocoa and sugar, the grains and other “softs”. You’ll never be able to store in proper condition, and even if you did, deterioration would set in after a few weeks/months. So you’d have to unload it quick, which defeats the whole purpose for which you took delivery. Commodity professionals have noses like bloodhounds for distressed parcels – so you will have your financial eyes gouged out when trying to get rid of your inventory. In something less than a perfect environmental regime, your physical will become worthless and you’ll probably have to pay to get rid of it.
What should additionally be evident from the above is the inherent price potential for physical Gold if delivery demands rise. Not many people are going to know what to do with a one lot of gasoil, coffee, wheat, etc., if they want it delivered. But one hell of a lot of people know EXACTLY what to do with a 100oz bar of Gold. Namely: Hold on to it – i.e. store it. This is what gives the possibility for a delivery squeeze in Gold such massive price outcomes – delivery and storage does not rely solely in the realm of the professional. The amount of people who could demand delivery of paper contracts, and feasibly take delivery is potentially massive. Of course, by the time such demands become manifest, it is unlikely paper claims will be honored. Just the scent of a delivery squeeze (as we learned from the Hunt Brothers experience) can cause mayhem.
Lastly – for the “you can’t eat Gold” crowd – how the logistics of an economic implosion play out vis a vis Gold are already evident in Zimbabwe. The forlorn and starving, including the elderly and sick, spend much of their day panning rivers and streams to amass the miniscule amounts of raw, unrefined, Gold, which is the only thing the hoarders will accept in exchange for the foodstuffs necessary to stay alive. For those who would like a real-life, current example of the “You can’t eat Gold” theory in practice, go to You Tube and search under: “Gold for Bread – Zimbabwe”, for a very harsh dose of reality (the video is not suitable for children and the faint of heart – it is, however, reality).
CIGA Pedro
