Gold versus paper cash - The Daily Reckoning
The Daily Reckoning by Bill Bonner
On This Day - 16 April 2013
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Gualfin, Argentina

We are delighted to see gold getting smacked down. International Business News:

    Gold prices posted their biggest two-session drop in 30 years Monday as retail investors and large institutional speculators capitulated to a six-month downdraft that accelerated in the last week into bear market territory. The violence of Monday's plunge reinforced the view that the 12-year bull market in gold is finished.

    In New York trading, a troy ounce of gold closed at $1,360.60, a more than 9 percent plunge and the most extreme drop since 1983.

    By the close of trading Monday the price was off more than 13 percent, or more than $200 per ounce, from last Thursday's closing price of $1,564.90.
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If you're in a card game and you look around the table...if you can't figure out who the fool is, he might be you. Then, you get nervous. You start rubbing your hands or scratching your forehead. The other players will see that you've lost your nerve. Then, you're finished...

We've been looking around the table of the investment world, too, wondering - who's the fool? The people who are buying stocks? Probably, but maybe not. The folks who are buying bonds? Yes...but who knows? Then, who is it? Are we the fools?

A lot of people think so. It was beginning to make us nervous.

Maybe there really is a recovery...however weak. Maybe the feds really do have the situation under control. Maybe the central banks are right to print money. Maybe it will be clear sailing from now until Kingdom Come. And we'll be fools not to be on the boat along with all the other stockbuyers and gold-dumpers.

Why is the price of gold falling? The papers say it's because speculators fear China is slowing...or that Cyprus will dump its holdings. The Guardian:
    Cyprus sell-off fears send gold price tumbling

    The price of gold fell to its lowest level in more than 18 months on Friday night amid fears that sales of the precious metal forced on Cyprus by its desperate financial plight would lead to wholesale dumping by hard-pressed countries in the coming months.

    At the end of a week dominated by the plight of the troubled Mediterranean island, gold slid below $1500 an ounce for the first time since July 2011 in anticipation that Cyprus would seek to raise €400m (£340m) by offloading a chunk of its reserves.
"Find the trend whose premise is false," says George Soros, "and bet against it."

And today, behind the drop in the gold price is a very foolish notion. The foundation premise is that real money (financial reserves) can be replaced by credit and debt. People who believe this must be the real fools in the market. Which takes some of the pressure off of us.

Imagine that you are a major holder of, say, antique Buicks. Imagine that you are in financial trouble. The market for antique Buicks anticipates the upcoming supply. Prices of old Buicks drop.

Okay...but are Buicks the same as gold?

Imagine that instead of Buicks you held cash...a big wad of cash in your vault. Then, in financial trouble, you need to open the vault, get out your cash and use it to pay your creditors. Does the market for cash go down? Does the value of your cash decline because people know you will have to give it to someone else?

The premise is false. Real cash does not become less valuable when people find themselves in financial difficulty; it becomes more valuable. People scramble to get it. They need to pay their debts...settle their accounts...reduce their illiquidity by raising cash. They need cash. The demand for cash goes up, not down.

But wait. Today's bills are payable in paper cash...not gold. Debtors must raise paper cash by selling their gold for paper. It's paper they need...not real money.

That's what makes this business so interesting, isn't it? And so funny. The whole system runs on paper money. People spend it. People borrow it. Now, people need more of it to pay their bills. So, they sell their valuables - namely gold - to get more paper money. Gold goes down, while central banks print up more paper money - just to make sure there's plenty to go around.

One day, however...and we won't say 'when'...(saying 'what' seems like more than enough to ask from a free publication)...people will stop worrying about the quantity of the paper and begin worrying about the quality of it. They will find that they have plenty of paper...and that more is coming all the time. They will look in their vaults and wonder what they will do with all this paper money. They will have bills to pay then too...and creditors with sharper eyes and tougher standards. When they offer these new creditors more of their paper money they will say 'uh un.'

They'll want some better cash. Gold, in other words.

Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.

Disclaimer:
The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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5 Responses to "Gold versus paper cash"

vimal shah

Apr 17, 2013

please give your comentry document width little smaller because we have to take computor key left and right to reed one line twice so for whole article wehave to move 100 times which is very boring and we have to left it without reading.

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Gaurav

Apr 16, 2013

I am getting scared of the 'prophetic vision' of Bill Bonner,
The gold bust, followed by the expected BOOM, and the markets crashing... all sounds scary!

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Venkatesan

Apr 16, 2013

I feel the argument Gold is supreme is very naive and for me the author is highly rhetorical about the excess cash and liquidity in the system. Simple, one has to be smart and move his positions as per the market and not simply hold a position for ever. For argument sake, what is the point to support someone entering gold at $2,000 an ounce just because it is shiny and based on the author's advise to hoard / hold. He/she might have lost a fourth of it by now. C'mon do not hold a single perspective on any matter, particulary we have subscribed this issue for money and expect some valueable advise.

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LOVEPAREEK

Apr 16, 2013

LOVED THE PART .... .(saying 'what' seems like more than enough to ask from a free publication)...GREAT. I ALWAYS HATE MODESTY, AND GLAD TO C U R FAR REMOVED FROM THIS VIRTUE

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LOVEPAREEK

Apr 16, 2013

DEAR BILL - I FIND AN ANOMALY IN YOUR ANALOGY OF BUICKS AND CASH - FOR WHAT I THINK, AS SOON AS CASH WILL CUM INTO MARKET, ITS VALUE WILL SURELY DROP , WHY NOT ? AFTER ALL, THATS INFLATION - RGDS

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