Why A Yield On Gold Matters

Picture, if you can, a world in which gold circulates as the medium of exchange. People pay for everything, from groceries to rent, in gold. Employers pay wages in gold. Productive enterprises borrow gold to finance everything from food production to constructing apartment buildings. In other words, picture a world where there’s abundant opportunities to earn a yield on gold and finance productive businesses in gold.

What Happened to Gold After the Gold Standard?

It is difficult to picture because it is so different from the world of 2021. In our world, the government first established a central bank in 1913, then prohibited gold ownership and voided all gold contract clauses in 1933. It finally severed the tie between gold and its official currency, in 1971. It decriminalized gold in 1975 but, by then, circulation of gold coins was a distant memory. Gold was intended to be no different than frozen orange juice and pork bellies, and less useful besides.

How Gold is Used Today – Speculation and Hoarding

Circulation once occurred spontaneously in the free market. But when the government makes it impossible for gold to circulate, then circulation is replaced by hoarding and speculative churn. Let’s discuss speculative churn first.

Post-Gold Standard Gold - Speculation

Speculative buying and selling of gold is not gold circulation. The gold is not even used to purchase goods, much less finance the production of goods. It is used as a betting chip in the Fed’s casino to win *sigh*more dollars.

Speculative gold changes hands whenever there is a price move. Which is every day. The new buyer does the same thing that the seller (the old buyer) did, he holds it waiting either for dollar gains or his stop-loss limit. This creates churn. Instead of the gold capital being used to finance businesses, it gets traded back and forth in zero-sum fashion -- creating winners at the expense of losers.

The casino analogy is fitting, for the only real winner in this activity is the house (the entity which facilitates the trade). They are happy to keep raking in fees and covering the bid-ask spread. They could care less where gold trades, only that it trades.

Post-Gold Standard Gold - Hoarding

Hoarding is different than speculation. Hoarding gold is perfectly legitimate and occurs in a free market for money and credit. If we do not have the right to hold our money in our hand, then what do we have?

But what causes hoarding of gold? Hoarding happens when the interest rate is too low. If you don’t like the rate, you hold onto your gold instead of putting it at risk.

We live in a world where governments impose price controls on borrowing. They declare the interest rate to be zero. What would happen under a gold standard if the government imposed ZIRP? No one would take the risk of lending, without being paid interest. In lieu of lending gold to the banks, they would resort to the next best thing. In a word, they would begin hoarding gold, putting it under the mattress. Hoarding removes gold from circulation.

In a free-market gold standard, hoarding gold causes the interest rate to rise until it becomes attractive to lend gold again. In a government-imposed dollar standard, this cause-and-effect mechanism is purposefully absent. No amount of hoarding dollars will affect any changes in dollar interest rates.

Gold Under the Dollar Standard

Since the 1971 severing of gold and dollars, the price of gold has gone on a tear. It has been up and down quite a lot. The way a lighthouse goes up and down a lot. That is, it appears to be going up and down—when viewed from the deck of a ship that is slowly sinking and tossing in stormy seas.

It is really the dollar, which goes down and up, but steadily down over longer time frames. This is uncontroversial, as the dollar’s managers openly state their intention for 2% annual debasement. However, this does not stop people from speculating on the price of gold. Indeed, it encourages them to do so. Nor does it keep people from hoarding gold as protection against a falling and failing dollar.

Gold is not used to finance productive activity (other than by Monetary Metals), but rather as something on which to bet. Gold earns no yield (other than for Monetary Metals clients), but rather generates capital gains. A productive enterprise does not pay you some of its profits, for the privilege of using your gold (other than, well, you know). Instead, a new buyer pays you more of his dollars to take the asset off your hands, than you paid the seller (hopefully). You have more dollars, but the Fed is working hard to reduce their value.

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