By: Gerald Perman
I wrote most of this a few days before the September collapse in the prices of gold, silver and the world stock markets. My intent was a response to David C. Harper’s “Best of Buzz” in the Sept. 20 issue of Numismatic News. Here are some non-myths about gold.
While the U.S. government may or may not be embarassed by the rising price of gold, the fact remains that price suppression, while often misunderstood or misrepresented, is really not a myth but more like a natural consequence of government mistakes and excesses. Perhaps some persons in government are embarrassed, but it is nearly impossible to generalize and condense their opinions into a unanimous consensus.
Sorry to burst the bubble, but here are some disturbing facts:
1) A free marketplace for gold doesn’t really exist. Gold, like all other commodities, has regulations in multiple world exchanges with margin requirements, trading hours, trading limits, varying trade price circuit breakers, watchdogs (e.g., the National Futures Association), etc. A free market probably can no longer exist in the U.S.
Governments also place import/export restrictions on gold. They do it for reasons similar to restraint on exports and melting of U.S. bronze cents, or for political reasons.
2) Profits on gold (bullion, coins, exchange traded funds, futures and collectibles) are usually taxed at higher rates, without benefit of a possible capital gains rate that stocks may attain. All risky personal investments, including coins, are discouraged by the federal income tax’s annual $3,000 loss limit. Perhaps they prefer us all to be wage slaves or they want a share of profits? There is no comparable $3,000 annual limit on gains (no surprise there). Gold held in retirement accounts is merely tax-deferred.
3) Gold prices are set twice daily by five members of The London Gold Market Fixing Ltd. at 10:30 a.m. and 3:30 p.m. London time. The five participants are members of the London Bullion Market Association and work for the banks (Scotia-Mocatta, Barclays Capital, Deutsche Bank, HSBC, and Societe Generale). Thus if governments were dumping gold instead of accumulating it, the bankers would likely let the prices fall (unless government arm twisting prevailed). What is the opposite of price suppression?
4) Gold, all other investments and even savings must compete against spending for current consumption at an unfair disadvantage caused by unbacked fiat currency. We call that disadvantage inflation. Adjusting for inflation since 1980, an ounce of gold purchased back then for $600 and recently sold for $1,800 would be subject to federal and state taxes on an imaginary value increase of $1,200 (taxes “ex nihilo,” or taxes out of nothing). Even if the ounce of gold was an inheritance not subject to taxes, the $1,800 price tag has less purchasing power than an outright gift of $600 had in 1980. This is what may be called Missed Opportunity Cost (MOC). So gold’s price has been suppressed for over 30 years.
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5) Sadly, all of the gold in Fort Knox turns out to be an insignificant amount of government wealth. Whether the U.S. government or the Federal Reserve has the rightful claim to the gold, it turns out to be equivalent to less than 1 ounce per U.S. citizen and probably is worth less than what is spent on gas and groceries in three months. If used to pay down the federal deficit at $1,800 an ounce, all the gold would be gone and there would still be a trillion fiat dollar federal government hole for 2011 alone. This should alarm people more than if Fort Knox was a completely empty hole in the ground.
6) Ironically, it turns out that rising gold prices (just like rising stock market and real estate prices) benefit governments that have the means to successfully tax both the real and imaginary profits. So governments would actually benefit more from gold through its price appreciation than suppression. But gold is really too small and insignificant of a commodity to fill the gargantuan needs of governments to diminish their debts by taxes and inflation. Gold gives little to tax and can no longer significantly affect inflation. Compared to stocks and real estate, gold is really small potatoes.
Finally, the biggest puzzle of all is the behavior of gold’s price versus the greenback since 1980. From 1980 to 2001, gold declined from a peak of over $600 to a bottom near $250 an ounce (20 rotten years of decline).This would seem to imply we were supposed to have deflation but it didn’t happen. Then from 2001 to 2011, gold has risen over 600 percent. But instead of 600 percent inflation, it has been moderate at slightly over 30 percent. It sounds like a liquidity problem. And what causes liquidity problems? Often it is either apathy or manias.
Usually when prices fall steadily over long time frames, it is a sign of apathy. Apathy suppresses demand. Housing prices are in the throes of apathy. Coin prices suffered from apathy from about 1990 through 1997.
On the other side of the coin, when prices rise too fast it is often a mania, or due to temporary shortages of supply or the sign of a currency heading straight towards worthlessness (e.g., the Yugoslavian dinar a few years ago). Thus, gold is now more likely in a mania state than an apathy state. And it appears that the mania bubble may just have burst during the week ending Sept. 24. Silver, by the way, was also down, over 20 percent.
7) There is plenty of gold if the government wants to waste resources to go after it (a habit too hard to break). Over 70 percent of the earth’s surface is covered in gold. The problem is that most of it is microscopically dispersed in sea water. Perhaps there is a lesson to this. A swim in the ocean or even a visit to a coin show is probably more healthy than worrying about or visiting some hole in the ground.
Disclosure: I had two long positions (in a cash account and IRA account) with the exchange traded fund for gold (ticker: GLD). Both were sold in late August for a significant profit after about 18 months of holding. I currently have no ETF positions and only one minor stock holding (less than $1,000). My other stock holdings were sold in January. I continue to hold my coin collection for the long haul and most of it is in two safe deposit boxes.
Gerald Perman is a hobbyist from California. To have your opinion considered for Viewpoint, write to David C. Harper, Editor, Numismatic News, 700 E. State St., Iola, WI 54990. Send email to firstname.lastname@example.org.