MY INTRODUCTION to the concept of gold as an investment began in the late 1980s. I was a young stockbroker in Arizona, and while copper mining dominated the extraction industries then, there was still talk of gold mines and claims on thousands of acres that might translate into billions for lucky investors. After the inflation scare of the late 1970s (shortly after the US abandoned the gold standard), confidence in the financial system had eroded. Gold was seen as a way to preserve purchasing power if a currency kept losing purchasing power (due to inflation). Even as prices were coming down in the late 1980s, investors called in to arrange purchases of gold coins and silver bars. They brought guns and family. Precious metals like gold, silver, and platinum are considered the oldest remaining currencies and have been minted into coins and used as stores of wealth for many centuries.

So at the time, my small Phoenix investment firm had created a sales agreement with a local gold and silver wholesaler and raised capital for a couple regional mining companies. The details are amusing now, but suffice it to say that Mark Twain had it right when he said that “a gold mine is a hole in the ground with a liar on top,” and that I developed the opinion that people who hoard or pursue gold go insane because gold is the color of borrowed light—the color of the moon. [Author’s note: the title of this blog post is taken from the Ennio Morricone’s masterpiece song of the same name from the soundtrack for The Good, the Bad, and the Ugly. The song also indicts the effect of gold.]

Then there’s the virtual equivalent of gold, cryptocurrencies, like Bitcoin. I mean, consider: it has to be “mined” and has some “rarity.” And the costs of mining one bitcoin and mining an ounce of gold are probably similar in time and equipment per some other unit of value (we might use dollars for now).

My point?

–Both bitcoin and gold have surged in recent months. It takes quite a bit of money to move those values that quickly. It’s not necessarily a good thing, either, for a couple of reasons. First, the money that went into bitcoin and gold came out of the banking system where it was reserve money against loans and must be replaced somehow. Second, gold historically (and bitcoin presently?) represents a loss of confidence in the global financial system. In other words, it might be hinting of large holders of dollars, euros, yen, or yuan who know something we don’t or who are doing some serious hedging against a looming financial crisis.  These two alternative currencies, gold and bitcoin, are somewhat broadly accepted forms of portable capital; you can take them with you wherever you go.

There could be a lot more to talk about here, but the move in gold and bitcoin could be harbingers of capital flight away from the highly leveraged, fiat (not backed by gold or commodity) currencies. It’s a puzzle whose answer deserves some speculation, because it implies a vote of “no confidence” in the larger system.  They were mostly wrong about gold and inflation during the 1980s, but levels of debt and leverage today dwarf those of thirty years ago–and we have had multiple major financial crises since then.

WRH