Take physic, pomp

Helvetia in a handcart: Why I own gold and why you should, too (from IKN297)

This was the main intro piece to IKN297, out Sunday. I’ve had some positive feedback on it so hey, what the henry, let’s put it here on the blog too.


Helvetia in a handcart: Why I own
gold (and why you should, too)
“We are not wholly bad or good
Who live our lives under Milk Wood”
Under Milk Wood, Dylan
Thomas, 1953
When it comes to the money events in and around Switzerland
last week, it’s difficult to recall an episode in recent financial times when
there was such a massive, ten tonne, snorting, stomping elephant in the room
and how the spectrum of Very Serious People made such a concerted effort not to
talk about gold. And in the end it’s not a difficult subject nor a hard concept
to grasp. It’s also one of the mainstay arguments of the hard-core goldbugs so
I suspect the moment I announce my full and unequivocal adherence to it I’ll be
pigeonholed and labelled as “one of those nutbars” (sorry to disappoint in advance and head y’all off at the pass; I’m not
a goldbug, I’m an owner of gold
Gold has no counterparty exposure.
But let’s not jump the gun, let’s take Dylan Thomas’s
advice and begin at the beginning. The important near-term effect of the move
by the Swiss National Bank (SNB) to remove its hard peg (1.2/1) against the
Euro was not the price move of precious metals, particularly gold. Not in the
near-term at least. The important near-term effect is found inside stories such
as this one (1) and here’s an extract (IKN bold-type):
Alpari, the London-based brokerage firm that sponsors the shirt of English
Premier League football club West Ham United, said it had to shut down its business.
In a statement, the firm said the
majority of its clients sustained losses which exceeded their account equity.
“Where a client cannot cover this loss, it is passed on to us,” it
said. “This has forced Alpari
(UK) Limited to confirm today that it has entered into insolvency.”
The scale of anger within the firm is
evident in a note that its market
analyst, Craig Erlam, published Friday before news of the wind-down. Bemoaning
the “idiotic actions of the SNB
,” Erlam warned over the
“longer term impact on the markets.”
Alpari’s demise follows that of Global Brokers NZ., a small currency trading house in
New Zealand.
Its director, David Johnson,
announced on the website of affiliate Excel Markets, that it could no longer meet the regulatory minimum to continue business.
“News of the impact of this
event on companies and traders is just beginning to come to light,” he
said. “As directors and shareholders we would like to offer our sincerest
apologies for this devastating turn of events.”
The two could be joined by FXCM, a New York-based currency broker, which
has already warned that it “may be in breach of some regulatory capital

after its clients experienced significant losses. Those losses, it said in a
statement, “generated negative
equity balances owed to FXCM of approximately $225 million.
Traders aren’t hopeful. FXCM shares
are down a staggering 74 percent in pre-market trading following a 15 percent
fall on Thursday.
Other firms, such as CMC Markets in
London, said they can absorb the hit. Though its chief executive, Peter
Cruddas, conceded that the firm sustained losses, he said the overall impact
has not materially impacted the group. “It’s business as usual,” he
We’ve had other “non-material impacts” reported by other
financial institutions, a phrase used in a context that made me laugh as the mere
fact they’ve had to announce them (and
will have to announce them, as there are surely more to come
) makes these
impacts material by nature and definition, it’s whether they’re large or small
compared to the size of the shop that will make them important. Semantics
aside, we’ve had Barclays and a hit in the “tens of millions”, Deutsche Bank
out by perhaps $150m, Interactive Brokers having to bear the brunt of
non-coverable client losses to the tune of $120m (at least IB issued an official statement and noted liabilities came to
around 2.5% of IB’s net value, which as an account holder was a personal
). And be in no doubt, there are more to come. The big shops will
take their hit and move on, the medium-sized may suffer longer, some small shops
may have to close. UPDATE: After writing up this note, news of the demise of a
$830m hedge fund, Everest Capital Global Fund, is now doing the rounds
Saturday afternoon. That’s more than just a “small shop”. Details here (1a).
And the reason for all these losses, be they paper or real
or job-in-suit? A top financial executive in Switzerland, supposedly the most
reliable, dependable and financially boring country in the world, went and did
something unexpected. Oh, the horror! And if I’ve seen the word “stupid” used
to describe Thomas Jordan (head SNB
honcho and where the buck ultimately stops
) and/or his decision, I’ve seen
it a hundred times from the financial mainstream, e.g. it peppers this note (2)
from economist Scott Sumner who then goes on and ends this way:
But there is a lesson here. Just as war is too important to leave to the
generals, monetary policy is too important to leave to the central bankers.
 Once again we see the markets are way ahead of the central bankers.
 One more example of why we need market monetarism.  Let markets
determine the money supply, interest rates and exchange rates.  Peg your
currency to NGDP futures prices. And if you are not going to do that, then for
God’s sake level target SOMETHING.
Sumner goes off on his personal agenda of Nominal GDP
targetting (and the new NGDP futures market, in which he has a central role) and
that’s his right; he’s a smart guy and he’s brought NGDP-think into the midst
of macroeconomic debate largely single-handedly over the past five years, which
is good. But he also touches on a point repeated in many places about central
bankers and about the anchor of policy, that of trust in Central Bankers.
Financial types have placed their absolute trust (up to and including their
employment status, reputation and net wealth, see above) in the people who run
central banks. What they’ll tell you is CBs are to “anchor” or “lock onto” or
“target” their policies, what they really mean is to make money. Lots of money,
lots of easy money. And now that trust has been vaporized and…oh again the horror!…by
the Swiss of all people. The Swiss! Gnomes of Zurich, accurate timepieces,
discreet bank accounts, enter the meeting room at 12:01 and expect a frown. Last
week’s episode is big because it’s about the trust one party places in another
to make the money world go round. Suddenly the people the really big moneymakers
trusted, well they can’t be trusted any longer. The SNB has showed, in one
quick and very painful move (for some) that risk is much higher than the
mainstream financial world ever suspected. Call it the risk/reward balance,
call it counterparty risk, call it VaR (value-at-risk), it’s all the same
thing. “How dare a sovereign state do
something that’s good for the sovereign state and not for us!”,
they snort
as one, to which Jordan replies (3), “SNB
is an independent central bank. It is our prerogative to prepare our decisions
on our own
”. Jordan is now “the most hated man in finance” because he
caught a very large number of self-important people off guard, causing them to
lose money and look as they truly are, lazy and complacent, in the eyes of
their paymasters.
Paul Krugman’s double-article take on the Swiss affair last
week also caught my attention (4) (5). He too zeroes in on the aspect of trust
in the Central Bank mechanisms and how that particular hull was well and truly
holed, which agrees with the consensus (after
all it was my own first thought, so macroeconomic minds far greater than mine
are duty-bound to see the most obvious
). But with Krugman, as with so many
others last week, it was the subject he didn’t mention that screamed loudest.
His gold-mocking credentials are well known, he even mentions the metal in his
piece but in another context (FDR and the gold standard) so it wasn’t as if the
aspect of what gold is and what it does and why great lumps of it sit in
Central Bank vaults was a missing thought. But when the conclusion to his note
Two things to bear in mind. First,
having in effect thrown away its credibility – in today’s world, the crucial
credibility central banks need involves, not willingness to take away the punch
bowl, but willingness to keep pushing liquor on an abstemious crowd – it’s hard
to see how the SNB can get it back. Second, there will be spillovers: the SNB’s
wimp-out will make life harder for monetary policy in other countries, because
it will leave markets skeptical about whether other supposed commitments to
keep up unconventional policy will similarly prove time-limited.
…and although he makes a spot-on point about the
punchbowl, he can’t bring himself to mention the absolute obvious about gold in
light of the Central Bank decision. And that brings us back to the ten tonne
snorting elephant in the room, back to the Very Serious People (which of course includes Krugman, even
though he uses the same phrase non-stop to mock his opponents
), back to the
non-counterparty advantage that gold brings to the table and why it popped hard
last week. On this subject I’m in complete agreement with the most hardcore
goldbug you’d care to mention. I’m two-thumbs-up with all the
libertarian-leaning monetary thinkers and self-styled gurus. Jim Sinclair? Yup.
That King guy whose first name eludes me that runs King World News? Count me
in. Doug Casey? Yep, he’s always been right on this. On other things we disagree,
but on this one Casey’s been constantly and consistently correct for decades. Don’t
own gold to be rich because gold doesn’t make you rich, it stops you from
becoming poor. Gold has no alpha, it’s not a vehicle for speculation and while
we’re at it, if you want to know whether it’s an asset class or a simple
commodity like all the other commodities (as we’re told non-stop by people
without the first clue of the stuff) just check the recent price chart for
nickel. And copper. And lead. And zinc. See much storing of value in those
materials? No, me neither.
For sure I play the market. I speculate with the rest of
them and that’s the reason this publication exists. Buying and selling mining
stocks, be they copper, moly, gold, vanadium, quartz, silver, uranium, frac
sand or any other miners, is speculation and the act of playing on the market.
But there comes a time when the playing has to stop and you put your serious
financial face on, you think about your kids, you consider what type of life
you want when our charming capitalist society decrees that it has no use for you
any longer so can’t you just go prune some roses or take a cruise or just get
out of the way and stop blocking the road with your slow moving vehicle,
please? Which is the time that gold bullion enters the scene. Owning Rio Alto
is very different from owning the thing that Rio Alto produces, period. It’s
not just a different set of priorities, it comes from a whole different place
financially speaking. Personally my needs and wants are modest, but I still own
gold because I know that even my reasonable, normal, comfortable, unobtrusive,
undemanding and pleasant middle class lifestyle could be stripped away from me
if I’m not careful. Owning gold is the act of being careful. And if that
applies to me, what kind of magnification applies to the people who are
world-level wealthy and worried that their wealth might be taken away from them
(thoughts that must lie on a deep inner level of their personal circles of
hell)? Those are the people who have placed their trust in Central Bank policy
and last week watched as their sure thing set-up took a very hard hit. How many
of them, this weekend, are asking their financial advisor why they don’t own
any/much gold? These are the people who don’t need to get rich, their
overriding desire is to avoid the potential of being poor. They want minimum
risk, zero risk and in things such as the Swiss Franc they thought they had
one. Today, for the first time ever, Switzerland is a land where negative
interest rates apply to savings and even to its bonds. Give them a thousand and
they’ll give you back 999, that’s not going to go down well with the serious
The ownership of gold removes you from the 10-1 chance, the
100-1 chance, the 1,000-1 chance the (here comes the SNB) 1,000,000-1 chance
that a human being on the other end of the line does something that suits him
better and suits you less, thus costing you money (the mainstream call it
“stupid”, see above). Owning gold isn’t about its monetary value today, or
tomorrow, it’s about its monetary value all the time no matter what system of
government, what currency you buy your bread in, whether you must bow your knee
to a king else get thrown in jail, whether you can call your head of state all
the names under the sun in public without issue. Though some do have grey
areas, the value of just about every other asset class is dependent on a
calculation that involves you + thing + other person’s opinion. But not gold, with
gold it’s you + thing, there’s no Thomas Jordan around to mess your
relationship up.

Last week was no ordinary week for gold. We can expect the
media to minimalize or even ignore the issue and hope it goes away, but this
time it really is different. I have suspicions but don’t really know how it’s going
to affect the price of gold in the next week or even the next month. But a year
from now? Gold under U$1.3k? No way. 

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