Poor Tim Harford

“The world is moving step by step towards a de facto Gold Standard, without any meetings of G20 leaders to announce the idea or bless the project.”

– Ambrose Evans-Pritchard, The Daily Telegraph.

Few publications have the capacity to enrage like the Financial Times. On the one hand, it carries thoughtful, well written and engaging commentary from the likes of John Kay, Luke Johnson and Gillian Tett. On the other hand, it regularly publishes Martin Wolf. The latest weekend edition does not disappoint. Tim Harford, hitherto unobjectionable, publishes what can only be an elaborate ironic joke against gold, ‘The Bundesbank takes back its doughnuts’..

For anyone that missed the news, Germany’s central bank is in the process of moving 54,000 gold bars from the US Federal Reserve and the Banque de France back to Frankfurt. What is that all about? Tim Harford:

There is no thinking behind that. This is gold we’re talking about, so we’re entering the asylum.

Strike One.

But gold has been a good investment – if one can call it that – over the past decade. Tim Harford:

It’s been an excellent investment. But there’s no logic behind the gold bubble.

Strike Two.

Perhaps he could be more expansive. Tim Harford:

..gold is a bubble because its investment value isn’t connected to the stream of income it produces. Housing produces rent. Bonds produce interest payments. Shares produce dividends, or at least the prospect. But gold doesn’t produce any income stream.. Therefore it is a bubble. It may remain an excellent investment: any bubble that has persisted for 4,000 years has to be pretty resilient.

Strike Three. You’re out.

It takes either guts or self-delusion to call yourself an economist when you plainly don’t understand money. JP Morgan once said that gold was money, and everything else was just credit. To us, that isn’t a bad definition. And money – in the form of US dollars, British pounds, Euros or Yen – doesn’t produce any income stream either. A dollar bill or a five pound note are, like gold, economically inert. They only produce income when they are transformed into bank deposits – a transformation that in the process exposes the holder to the credit risk of the depositing institution. But at the moment, cash deposits are effectively yieldless, meaning that savers are now exposed to return-free risk. A flight into real assets at this juncture would be grounded on reason.

Tim Harford is, of course, free to insult savers in gold, just as Martin Wolf is free to insult Austrian economists – of a school of thought he recently described as “an American disease” (words which we suspect will come back to haunt him) – who understand that field more profoundly than he does. But the debate is only valid in the first place if the insult contains at least a germ of underlying truth. Implying that people, and central banks, are mad to hold gold also implies that we should hold our savings in the form of conventional, fiat currency instead. How has that worked out as a store of value? Since 1913, when the US Federal Reserve (a private banking cartel as opposed to an arm of the US government) was established, the US dollar has lost 98% of its purchasing power. With state money printing now accelerating to a level never seen before in world history, is the purchasing power of paper money likely to be enhanced, or further degraded relative to hard assets?

The bubble is not in gold, it is in paper. There is admittedly something rather endearing about the concept of a 4,000 year old bubble. But most professional investors would use a more pragmatic definition of the word. A bubble, by definition, pops. Has gold popped? Every paper currency in the history of mankind has burst. Every single one. Which store of value has the better long term claim?

Gold ‘bugs’ are not irrational. It is a fairly unusual bubble that enjoys such little participation from investors: private institutional ownership of gold worldwide is almost non-existent. And it is paper money unbacked by anything of tangible value that we would be mad to use to the exclusion of all else. There is a fundamental illogic to Tim Harford’s criticism of central banks for holding gold and repatriating it, when he simultaneously grants them validity in controlling conventional fiat money. They cannot at the same time be mad in using gold as a store of value and sane for the issuance, management and manipulation of the supply of unbacked fiat, can they?

Detlev Schlichter recently demolished the case for the $1 trillion platinum coin, a proposal that highlights the desperate absurdity at the heart of modern western central banking. It is critically important that investors and savers understand the desperate absurdity driving monetary policy and currency debauchery.

The ghoulish problem that we face is that we know that this system will unravel, but we do not know when. The pragmatic response, then, is simply to hold one’s wealth in those forms of saving and investment that are least likely to depreciate in real terms – and which also hedge against the widest possible range of potential economic and political outcomes – for the duration of this long emergency. That need not mean gold exclusively. But it’s certainly a fine place to start. Tim Harford would disagree – and that would also be an excellent argument in its favour. Sell economic ignorance; buy gold.

A version of this article was previously published at The price of everything.

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20 replies on “Poor Tim Harford”
  1. says: Paul Marks

    The Financial Times no longer enrages me – because I no longer read it.

    Unlike the (vile) Economist magazine the “FT” does not even pretend to be a free market publication – so it is not out to deceive anyone. It is a newspaper for leftists (but leftists with a particular interest in business and finance) – I am not a leftist so it is not a newspaper for me (fair enough).

    And, unlike yourself, I never rated John Kay very highly anyway.

  2. says: Captain Skin

    A 4,000 year bubble? Hahahahahahahahahahahahaha

    Just in case Tim Harford gets around to reading this comment…

    Fiat money is the counter party promise of a government, that has no value in and of itself (You could argue that it has value as toilet paper, or to keep you warm when it is thrown onto a fire).

    Governments around the world have record debts, and increasing deficits in this valueless paper. These debts cannot be paid back, so they will be defaulted on. What is this money worth then?

    Gold and silver have to be dug out of the ground, refined, and minted into coins or bars, and both have been recognised as mediums of exchange and stores of value for the last 4,000 to 5,000 years, the world over (Hence the bubble in Tim Harford’s mind). Gold (and silver) don’t answer to any government, and have no counter party risk.

    Bearing in mind that no fiat currency in history has ever survived up till now, which money would you prefer to hold?

  3. says: Mr Ed

    Bonds don’t produce income, housing does not produce rent, bank deposits do not produce interest, unless in every single instance, money is actually earned as a result of the action, recovered and paid out, which this person only acknowledges as a possibility for shares. It is lump thinking to consider that owning a physical asset produces income, it might be capable of so doing, but that requires speculation and management of a risk. Consider CDOs and buying mortgages. Each mortgage is only as good as the interest paid and capital repaid on it by a real person to the mortgage owner, with intermediaries taking a cut. Take 100,000 ‘sub-prime’ mortgages (if ever there was a clue in the name, it was there!), if 20,000 result in default, c. 20% of the investment may be gone, and many others written down.

    Those who own gold and silver as investments are speculating too, there is no guarantee that the subjective valuation of others in the future might not be that gold is no more valuable than Osmium, or Silver than Tungsten, but given the thousands of years of history, they presumably are willing to take the risk.

    Napoleon III had aluminium cutlery for his most honoured guests, gold for the rest, as aluminium was then fiendishly difficult to extract from its ore and the metallic form was novel and rare, and highly prized. Now it is abundant and readily extracted, but gold remains precious in enough people’s minds.

  4. says: Mat Peck

    Yes, gold is a bubble. I will remind my great great great great great grandchildren to get out quick!

  5. says: Mat Peck

    In fact their has been serious speculation that the intergalactic council are considering replacing gold as the currency standard with either water or liquid oxygen, in conjunction with the Zorbon empire.


  6. says: Paul Marks

    Mr Ed – agreed on all points.

    But I think we agree that gold is less than of total risk that bits of paper with government ink on them (or credit digits on a computer).

  7. says: James

    Reminds me of The Times editorial from early August 2011 (think it was the 5th or 6th) arguing that Gordon Brown was right to have flogged Britain’s gold at the bottom of the market, on the grounds (as I recall) that gold was “a speculative asset” that central banks had no business to be “speculating” in. It stuck in my mind as perfect an illustration of clueless British-elite conventional “wisdom” as it was possible to get, which is why I’m so confident about the date of the piece. I only wish I’d saved it – if only to contrast it with The Times’s commentary on such matters when gold’s at $3,000+.

  8. says: Paul Marks

    Quite correct James.

    By God, the media are ignorant – and not just the Times, the Daily Telegraph also.

  9. says: Gary

    They are either that ignorant, James, or they know exactly what they are doing and fully intend to keep their paper wheeze going, which enriches the elite so much at our expense.

    I suspect that is exactly what they are up to, or why else was the FED created under so much secrecy and railroaded through the Senate 54 to 34, but after almost 30 senators had already left for Christmas ?

    1. says: CaptainSkin

      Exactly. Clueless socialist politicians are one thing, but who do they really answer to?

      The real elites that run things are one step removed from this ‘representative’ democracy, and are not half as stupid. They know what the end game will be…

      Quis custodiet ipsos custodes?

  10. says: Gary

    I might add that the most intriguing question for me is not WHY Brown sold the gold(although that is of course intriguing), but WHO bought the gold at the bottom for a veritable gift ?

  11. says: Richard White

    Does anyone have a view on the merits of Gold and Silver mining shares held via a unit or investment trust?

    1. says: Captain Skin

      Casey Research have a very good report on their website, if your looking to invest in the miners. It’s free

  12. says: Rob Thorpe

    “There is admittedly something rather endearing about the concept of a 4,000 year old bubble”

    It’s not only an endearing idea, it’s not even his. I haven’t read Harford’s article because I don’t have an FT subscription, like Paul I can’t be bothered with it. But, he sounds an awful lot like Mencius Moldbug here. Moldbugs point is inspired by Menger, but with additions.


  13. says: Paul Marks

    If a bank (or other enterprise) is about to bankrupt unless one sells gold, then……..


    “But Paul it is a very important enterprise and other enterprises are connected with it and ….”

    All the more reason to let the rotten enterprise (and its rotten trading partners) go to the wall.

    Yes it will be tough – but letting this corruption fester and spread is worse.

    As we will all find out this year – yes this year.

  14. says: John Butler

    There is a way to square the circle here. Consider central banks as profit-maximising. They normally earn seignorage income as their assets pay interest but their liabilities (banknotes) pay none. But because those interest-bearing assets are now yielding close to zero, they are accumulating gold instead, which should appreciate in value as long as rates remain low, protecting them to some extent should rates eventually rise and/or FX reserves depreciate in value. Now apply a little game theory and see what happens … the pace of gold buying should rise EXPONENTIALLY!

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