"Gold is Useless, And Therefore Perfect" plus other essays for potential posts
The following are some unfinished sections and notes on Gold and global markets used in putting together a piece for zerohedge readers entitled: What Do Michael Every and Zoltan Pozsar Even Disagree About? It reads like a collection of essays cobbled together. enjoy VBL
Gold is Useless, And Therefore Perfect
In a world like we are currently headed, where trust is damaged; an objective, previously agreed upon Medium of Exchange MOE (by parties who otherwise do not trust each other) that has risk neither of rampant unpredictable debasement nor interminable backwardated short-squeeze other than its own technological/energy tied rate of production, is needed.
Gold’s uncorruptability makes it an ideal SOV. It’s lack of subjectivity (it doesn’t care about GAAP vs non-GAAP) makes it in Mercantilist times the best current MOE. Nothing else exists like Gold, and now Bitcoin - Gold’s younger, more nimble, less experienced cousin.
There is largely no other broad industrial use for Gold for now. All Nations have it, they agree it cannot be fraudulently duplicated, and it is universally accepted. It generally cannot be monetized or leveraged into some other finished product or thing. It cannot be used for anything, and therefore improved upon by man. It is perfect for what its needed right now. But they cannot admit that, ever.
It is very doubtful Gold will ever be announced in the West as a monetary standard again. It is even more doubtful institutions like the IMF will ever state they use Gold as part of their SDR basket. If they did it would be as a very last resort. To admit Gold is money publicly is to refute neo-keynesian economics arguments. It would undermine their own philosophy! But privately, the IMF and member nations will hold Gold by proxy even if they do not admit it. Some currencies within the SDR baskets will be explicitly or implicitly backed by Gold again soon. Why else would the IMF demand Gold as collateral for loans to countries it bails out? But that is for another time. Gold is already being used, at least since 2017 by Russia and China in trade. But only recently since the Ukraine war are they talking about it.
We don’t usually wax romantic on Gold in this space. But today we will. Last week we posted a video by the crypto couple that lambasted Gold. It’s not even worth rebutting it. But believe me, we can. It would be child’s play. But we love bitcoin as well. So we decided to get a little philosophic about it.
“And Yet It Exists”
When Galileo recanted his statement that the Sun was the middle of the solar system and not the earth; he allegedly had a parting shot. He said: Eppur si muove. And Yet It Moves. His point was: I deny it, but the fact still remains, the Sun is the center and the earth moves around it. The truth is plain to see.
Which is a tremendous phrase that applies to Gold. Why?
Gold is practically useless having been replaced by less expensive and more plentiful substitutes. And yet it persists in existing. Ironically, it remains valuable. Why?
The philosopher once said:
But tell me: how did gold get to be the highest value? Because it is uncommon and useless and gleaming and gentle in its brilliance; it always gives itself. That is why. Only as an image of the highest virtue did gold get to be the highest value. The giver's glance gleams like gold. A golden brilliance concludes peace between the moon and the sun. Uncommon is the highest virtue and useless, it is gleaming and gentle in its brilliance: a gift-giving virtue is the highest virtue.
Wait… Gold is valuable because it is useless? YES. What he was saying actually meant: Gold’s mere existence gives with no demands in return. It wants for nothing like no other material. It cannot be improved upon.
Gold is valuable because it gives of itself freely. This is the highest virtue. Gold represents the selflessness humans hope to achieve. And there is no common use for it. Yet it exists.
Gold has no demands in return. What does it give? It reflects light like nothing else on earth. It consumes no energy, does not tarnish or need cleaning, malleable into any shape. It reminds us of the brightest star in the sky.
Goofy?
Sounds kind of goofy right? Not to us. Gold’s lack of industrial application is why it is so valuable. Because it cannot be used for anything else, yet is immutable, permanent, rare, and demands nothing in return- it is money.
Put another way:
It has no counterparty risk. Once you have it, costs nothing to maintain. It gives of itself for the rest of your life and asks nothing in return. Not maintenance, not feeding, not polishing, not water, not obedience. It doesn’t risk breaking. You cannot destroy it. It is what it seems to be.
Peter Bernstein is famous for his book the Power of Gold. But it is the book “Against the Gods” that I find my favorite quote from him on it:
Paraphrased he says:
Gold will remain valuable until we find a good industrial use for it. Until that time comes, it is the best form of money on earth. It’s lack of industrial application makes it perfect for the task. That is its value.
In these times, wouldn’t it be nice to have something in your life that demands no attention and neither deceives nor confuses facts with opinion? ( we’re not salesmen… lol)
People have forgotten that in this modern financialized marketplace. Stability is not valued anymore. That will change.
Eppur si muove
Rise of Bretton Woods 3 Concept Leads to Mercantilism
How is now like then? At grass roots, our current situation is just like the 1870-1910 period before WW1. Governments did not trust each other (local war, sanctions, domestic debasement) financially. Nations, nevertheless needed each other's goods and resources (like we do now) for their own economies. Nations had become reliant on shipping lanes (supply chains now) for goods transfers to keep their domestic growth going. Globally agreed upon money was needed to obviate the mistrust.
Back then, under a hard money Gold standard, the amount of Gold a country held was indicative of its buying power for trade in a still fragmented world. Now, with sanctions, an increased awareness of supply-chain fragility and terms like "friendly and unfriendly" status, the world is re-fragmenting. Hard money in the form of a BW3 type event is increasingly seen as the answer for trade once again.
Money as Mediator
Gold was a hedge against globalization that was growing up from regional bilateral type trade deals. In a world where your country trades with 2 other countries who don’t deal with each other for ideological or political reasons, your country must find a medium of exchange that all three can agree upon, even if those other two dislike teach other. You must do it for your own survival. The money you get paid with by one, must be acceptable as payment by the other. They all agreed on Gold then, even if it was anathema to their post renaissance ideals. It was and apparently still is the currency of last resort.
Mistrust between countries risked fragmenting their precious new trade routes (supply chains now). A World Gold Standard was the solution. Capital and current accounts were also implemented. That worked quite well at keeping countries "honest" with each other and inflation in check. The problem then became deflation. Enter Mercantilism.
Mistrust Leads to Mercantilism and Eventually World War
The more stuff your country bought, the more gold it needed. Therefore you had to get more gold or risk boom/bust cycles with very high deflationary unemployment. You needed more money. You needed to get as much Gold (money) as you could. That is what mercantilism is all about.
The Gold standard fostered a mercantilist philosophy. Accumulate Gold to keep growing or risk domestic strife. Colonialism (and eventually World War1 ) was an ugly byproduct of that search for Gold due to Germany's Nation-state unification being delayed. But that is for another time. Suffice to say, Industrialized nations started accumulating Gold hand over fist.
World War 1 and World War 2
German strife before WW2 was almost entirely the result of Germany not having enough gold to pay its bills. Germany was last European power to unify back in the 19th century. They didn't colonize much, were overly punished for WW1 (payments in Gold) and could not pursue mercantilism to grow their economy. German domestic inflation was the flipside of them exporting deflation. So they invaded for room to grow and resources. Note: Right after World War 2, the Fed was given its "full employment" mandate, to make sure a deflationary depression never happened again.
In 1971 Gold was serially dropped by the west as money since countries felt they needed less constrained monetary growth. Opening global financial markets also made it increasingly hard for the US to keep its Gold stateside back then. Note 2: The US then gave the Fed its second mandate in 1977 to keep prices stable and fix their 1971 miscalculation.
From World Peace to Orwell's Nightmare
Enter liberal democracy and Globalism, which fostered decades of no world wars among industrial nations. Plenty of wars for EM resources like Oil, but no more global conflicts. And now, with covid and the Russo-Ukraine war, we are reentering mercantilism as a result of renewed mistrust. Russia knows this. China knows this. Their forays into hard money as a hedge for trade risk isn't an overnight thing. They've been planning it for years.
Bretton Woods 3 and Mercantilism Started in 2017
Russian and China have been preparing for the possible dethroning of the dollar, or at least the bifurcation of World Trade into friendly and unfriendly status since 2017.
Russia and China: Already Using Hard Money Since 2017
In 2017 we were informed by "wet barrel" oil dealers who were our trade counterparties that Russia was doing Oil-for-Yuan deals with China as part of testing a new trade mechanism. We wrote about it back then.
Deals are being done, Russia/china oil for gold using Blockchain over the past several months. A few months ago $3b trades that way. And the info was that the gold paid to Russia never left the Chinese vault.
The unconfirmed rumor was they were testing a blockchain type of system. The idea was, Russia would sell oil to China. China would pay with Yuan. That Oil/Yuan deal would have a clause in the contract saying the Yuan had partial convertability for a swap into Gold. That amount of Gold, however much it was, would remain in SGX and be earmarked (blockchain?) as part of the Russian deals. This gold would not be pooled or rehypothecated.That was the story anyway.
That story turned out to be partially verified by our sources back then. Russia was doing Oil for Yuan deals. We could not ascertain if there was Blockchain involved. But we were told it was some sort of potential replacement for Swift if ever needed. February this year, that concept was given full flight. Here is a Reuters article from March:
Probably something that had already been tested for years…
Point is, give it a name, Bretton Woods 3 is already here.They didn't invent this overnight. Neo-Mercantilism and the race for resources for which to trade with unfriendly nations is needed.
It's Either a New "Gold Standard" or Much Worse
Quite possibly, if we don't get a truly international Bretton Woods 3 type event, the alternative will be a world split largely between ideologies in trade terms, with only those nations that have enough resources and can withstand sanctions from unfriendly nations to survive. Covid and the Russian war have exposed the problem.
How We Got Here... Again
Mistrust changes international behavior. First, something happens that raises awareness of the current supply-chain system’s fragility; Covid.
Then concerns between trade partners grows. Domestic unrest for various reasons escalates. Your nation must pull in the reins and take care of itself. That is when (neo)mercantilism takes root. Real collateral matters. Then: you get a war (Russo-Ukraine) that elevates the concern to mistrust. Finally: you need to expedite your trade fragmentation hedges (bilateral trade-deals, resource procurement, domestic supply chains) to minimize transitional damage. That is where we are now.
How To Hedge Global Trade Dying
In a mercantilist world, trade also becomes more regional as a function of globalized supply-chain abstractions breaking down to simpler component parts. Is my trade partner my neighbor? Then I prefer trading with him. Even if that is a slight monetary inconvenience. Good trade decreases the chances of war. And geographically, chronic war is historically most likely (not necessarily the worst, just most probable) with contiguous nation states. This is akin to self-sufficiency in crises as well.
You need short, reliable supply chains to secure what is needed for your people. If a non-local foreign nation steps towards your trade partner, you will likely fight alongside of him against that invader. These are nation-state level arranged trade marriages.
But even if you trade with your next-door neighbor only (you don’t but lets say you do to make it obvious), your neighbor still trades with others.. So even though he trusts you, he can't take your money to pay for goods he gets from those other trade partners right? All deals become regional or bilateral deals. The money has to be agreeable to everyone, even if the politics is not. Enter Gold. Enter Bitcoin. Enter Gold/Bitcoin for Oil/Gas deals. Enter truly globally neutral money. See El Salvador and Honduras recent establishment of a Bitcoin trade zone. These regional-ideological trade partnerships all are symptomatic of mistrust and a raised awareness that there are solutions now in Bitcoin and Gold.
What Zoltan Pozsar and Michael Every Describe Is Very Scary
From different disciplines, Pozsar and Every describe the same thing. The implications are even bigger than they let on. Money, trade, political ideology, and natural resources all come together in a concept written up in Joseph Tainter's book, Collapse of Complex Societies. The signs of complexity collapse as outlined include:
Lower stratification
Less centralized control
Less sharing, trading and redistribution of resources
Less flow of information between a (global) center and its periphery
Smaller territory integrated with a single (non global) political unit
We can think of no better examples of complexity collapse than what we are experiencing right now: Trade deglobalization, monetary fragmentation, and rising mercantilist policies. Frankly, if the worlds tensions are not fixed soon, Then a Bretton Woods type global trade agreement is necessary to continue co-existing peacefully
Trade agreements reduce risk of dispute by increasing opportunity costs of war. And with our need for global trade, it makes such agreements like a BW3 and necessary mercantilist policies more, not less, important to keep world peace. Art best the alternative is an entirely different book
Michael Every and Zoltan Pozsar are both right, but the problem is much bigger than being let on in our opinion.
What Do Michael Every and Zoltan Pozsar Even Disagree About?
Authored by GoldFix Substack For Zerohedge
Recently we read several excellent articles on this site re: the current situation as it pertains to the Russia, The US, China, and of course Gold and Bitcoin. Here are 3 core posts for reference:
Zoltan Pozsar: The Death Of The Petrodollar And The Rise Of Bretton Woods III, - Zerohedge Prem
Why One Strategist Thinks "Bretton Woods 3" Is Never Going To Happen- Zerohedge
and Gold: "A crisis is unfolding. A crisis of commodities"- Zoltan Pozsar- GoldFix
There have been several related posts since the Zoltan piece on Bretton Woods 3. GoldFix's most recent one is here. The most recent was ZHs take on Michael Every's Mercantilism post as rebuttal to the BW3 concept. We have yet to actually see Rabobank's original research, but aim to. What follows is a synthesis Pozsar's BW3 natural resource collateral concept with Every's Mercantilism explanation as trade policy.
Spoiler Alert: Frankly, we aren't sure what the two economists might disagree on except possibly labeling rights. They are both right... and there is alot more at stake.
Bretton Woods 3 and Mercantilism Are The Same Thing
Before World War 1, technological advancements made global trade more possible than ever before. World trade routes (supply chains) grew faster than international trust. Inflation/debasement of money was a big risk as a function of mistrust between governments who could just print money to buy goods. Paper fiat wouldn't cut it for international trade. They needed a tie that bound them all together.
For example: Steamships traversed the globe, but "funny looking" Russian money was not trusted for Argentinian beef (like now). The solution was a uniform monetary unit that could be agreed upon despite mutual mistrust. Something uniform, unfalsifiable, and internationally accepted... Gold. Mercantilism was the response to the Gold standard then, as it will be of a BW3 concept now
Mercantilism is an economic policy that is designed to maximize the exports and minimize the imports for an economy. It promotes imperialism, colonialism, tariffs and subsidies on traded goods to achieve that goal. The policy aims to reduce a possible current account deficit or reach a current account surplus- Wikipedia
To keep exporting goods, a nation had to keep growing its money supply. To do that it had to get more Gold. Therefore, a BW3 type event necessitates securing whatever is needed to have more hard money- be it Gold, Natural Resources, Bitcoin or whatever.
Back then they all agreed upon Gold. Now, it may be Gold as proxy for natural resources, and quite possibly Bitcoin. A BW3 type event is today's version of a Gold standard back then. It is (i.e. Gold for Oil/NatGas, Ruble/Gold, Bitcoin for trade) already slowly happening. Mercantilism is the policy governments pursued then, and are increasingly using now to manage hard money risk. Bretton Woods 3 and Neo-Mercantilism are coincident and indicative of each other. There is no practical difference. Further, gold standard then is the map for the BW3 hard money path now.
****More Notes and Previous Drafts****
Gold is Useless, And Therefore Perfect
In a world like we are currently headed, where trust is damaged; an objective, previously agreed upon Medium of Exchange MOE (by parties who otherwise do not trust each other) that has risk neither of rampant unpredictable debasement nor interminable backwardated short-squeeze other than its own technological/energy tied rate of production, is needed.
Gold’s uncorruptability makes it an ideal SOV. It’s lack of subjectivity (it doesn’t care about GAAP vs non-GAAP) makes it in Mercantilist times the best current MOE. Nothing else exists like Gold, and now Bitcoin - Gold’s younger, more nimble, less experienced cousin.
There is largely no other use for Gold for now. All Nations have it, they agree it cannot be fraudulently duplicated, and it is universally accepted. It generally cannot be monetized or leveraged into some other finished product or thing. It cannot be used for anything, and therefore improved upon by man. It is perfect for what its needed right now. But they cannot admit that, ever.
It is very doubtful Gold will ever be announced in the West as a monetary standard again. It is even more doubtful institutions like the IMF will ever state they use Gold as part of their SDR basket. If they did it would be as a very last resort. To admit Gold is money publicly is to refute neo-keynesian economics arguments. It would undermine their own philosophy! But privately, the IMF and member nations will hold Gold by proxy even if they do not admit it. Some currencies within the SDR baskets will be explicitly or implicitly backed by Gold again soon. Why else would the IMF demand Gold as collateral for loans to countries it bails out? But that is for another time. Gold is already being used, at least since 2017 by Russia and China in trade. But only recently since the Ukraine war are they talking about it.
NeoMercantilism is the Policy, Bretton Woods 3 is the Money
So as far as we are concerned, the current situation lends itself to both a Bretton Woods 3 and a Mercantilist world. Bretton Woods 3 is the updated monetary solution ( updating money to include a basket of hard assets, and implicitly Gold) to the fragmented trade that demands a more mercantilist solution.
As trade decentralizes, Gold and now Bitcoin serve as a bridge from what was, to what will be. Trade will keep flowing. Gold is a common ground to keep things flowing. Slower, but flowing nonetheless.
Bernanke: Gold Is A Bridge to “Real” Money
If supply-chains are no longer global, then the money used has to be global. That is how Neo-Mercantilism does a “work-around’ to combat receding global trade. But they will never admit Gold has value. They cannot. For to do so would contradict everything they believe about where value is created and stored. Remember this?
Ron Paul: "Do you think gold is money?" If not, "why do central banks hold it?"
Bernanke: "It's tradition"
Bernanke just could not admit that Gold is money. Here’s why. The world’s leaders, like us, are children of enlightenment. They believe Gold is merely a bridge from one real value to another. They believe it is a “traditional” relic of the past. It is not a Store of Value to them, but a suitable MOE in a pinch. Our leaders believe real monetary stores of value are created by humans and their work product. Gold is just a bridge from one value to another; a medium of exchange. We agree. But sometimes it’s a slow moving bridge.
We can live with Gold being an MOE and not an SOV to facilitate the ideological biases of neo-keynesian economists. We’d simply remind them that sometimes you get stuck on the monetary bridge a lot longer than you want. That makes Gold the money of last resort; the monetary bridge. We’re on that bridge now.
What comes next? Probably some Golden Yuan and from there a new Fiat regime. But they will not throw away Gold ever again.
True money cannot backwardate. The difference between money today and money tomorrow must be entirely present value vs opportunity cost of time. Silver cannot be (official) money again because of this. But it will be worth a shit ton more if Gold is made into money. Why? Because then it will be valued by its scarcity to Gold and the ratio will revert. Silver will be Gold as far as everyone is concerned. It will be insane
Recently we read several excellent articles on the current situation about the start of global trade as it pertains to the US, China, and of course Gold. Most of which we have shared here in one form or another
This topic interests us as students of history. We also have written several pieces on this over the last 5 years. While we are not experts, this is a big part of learning with regards to economics, complexity collapse, and historical perspectives on money. Specifically, Gold, Mercantilism, Chinese trade, the Petrodollar, Bitcoin, MMT as Marxist doctrine,and capitalism ideology in general.
Below is a twitter thread on the topic of Mercantilism, monetary solutions, complexity collapse, and China/US relations that kind of ties the concepts together. There is a lot in the thread that is very debatable no doubt But the interest in this topic has been there for quite some time, since 2017 actually. If one appreciates Gold, one must learn monetary history.
Since 1971 the US has successfully used bait and switch to keep the world on USD regardless of what actually comprised it.
1-1944-1972WW2:Gold backed when the world needed counterparty risk minimized
2-1971 to present: gdp backed when we needed to outgrow our spending pic.twitter.com/bpNQ04cyTF— VBL (@VlanciPictures) January 6, 2020
There have been many related posts since the Zoltan piece on Basel 3. GoldFix wrote one as well HERE. The other excellent recent piece was ZHs take on Michael Every's post on Mercantilism as a kind of rebuttal to Zoltan's Basel 3 report. We have yet to actually see Rabobank's original piece yet, but aim to. What follows is an attempt by GoldFix to synthesize Pozsar's Basel 3 concept of natural resource collateral's importance, with Every's Mercantilism explanation as a trade policy. But using Gold as the focal point, not the periphery...
Spoiler alert: The two opinions are different explanations of the same thing mostly. We quote neither author until we have read Every's report in full.
Gold Is Insurance Against International Distrust
The amount of Gold a country holds is indicative of its buying power for trade in a fragmenting world where Mercantile policies reassert themselves. It is held for the protection of its people and thus a its own nation-state existence. Gold is the insurance policy against world chaos. And since all insurance is an actuarial concept; Gold is a Put Option on a nation’s Fiat.
How much Gold your country has is what you can buy when your Fiat is less accepted in trade. Even if your Fiat’s non-acceptance abroad is from no fault of your own. Gold is in Financial analysis terms, a nation’s hard tangible book value. Analogously, a nation’s GDP is its price to hard book. In a world where trust is collapsing, abstractions like global trade don’t do as well. Trade partners who wish to continue doing business must agree on a medium of exchange that even their enemies will agree upon. Money that doesn’t take sides is needed to do this.
Collapsing Global Trade
Gold is a hedge against collapsing globalization that has devolved into less complex yet more numerous bilateral trade deals. In a world where your country trades with 2 other countries who don’t deal with each other for ideological or political reasons, your country must find a medium of exchange that all three can agree upon, even if those other two dislike teach other.
DeGlobalization causes Complexity collapse- Gold saves the situation form chaos…
You must do it for your own survival. The money you get paid with by one country, must be acceptable as payment by the other. That is why you use Gold as a kind of trade intermediator. It is something you all can agree on. Especially when trade becomes more local by default. Sure you'd like to use oil or nat gas, but how?
Neo-Mecantilism is The Result, Not The Cause
First, something happens that raises awareness of the current supply-chain system’s fragility. Covid. Reliability concerns between partners grows. Domestic unrest for various reasons escalates. Your nation must pull in the reins and take care of itself. That is when (neo)mercantilism takes root. Then you get a war that takes your concern to straight up mistrust. Then you need to expedite your mercantilist hedges of reconstituting trade and supply chains to minimize transitional damage.
In a mercantilist world, trade also becomes more regional as a function of globalized supply-chain abstractions breaking down to simpler component parts. Is my trade partner my neighbor? Then I prefer trading with him. Even if that is a slight monetary inconvenience. Good trade decreases the chances of war. And geographically, chronic war is historically most likely (not necessarily the worst, just most probable) with contiguous nation states. This is akin to self-sufficiency in crises as well. You need short, reliable supply chains to secure what you need for your people. If a non-local foreign nation steps towards your trade partner, you will likely fight alongside of him against that invader. These are nation-state level arranged trade marriages.
But even if you trade with your next-door neighbor only (you don’t but lets say you do to make it obvious), your neighbor still trades with others.. So even though he trusts you, he can't take your money to pay for goods he gets from those other trade partners right? All deals are bilateral deals. The money has to be agreeable to everyone, even if the politics is not. Enter Gold.
Russia, China, and Oil for Gold
In 2017 we were informed by dealers that Russia was doing Oil for Yuan deals with China as part of their testing a new mechanism for trade. The rumor was that it was a blockchain type of system they were testing. The idea was, Russia would sell oil to China. China would pay with Yuan. That Oil/Yuan deal would have a clause in the contract saying the Yuan had some convertibility for a swap into Gold. That amount of Gold, however much it was, would remain in SGX and be earmarked (blockchain?) as part of the Russian deals. This gold would not be pooled or rehypothecated.
That story turned out to be partially verified by our sources back then. Russia was doing Oil for Yuan deals back then. We could not ascertain if there was Blockchain involved. But we were told it was some sort of potential replacement for Swift if ever needed. As early as February of this year, that concept was given full flight. Here is a Reuters article from March:
Probably something that had already been tested for years…