Gold as Greed

It's tough for people where I live. I don't mean Glaswegian council estate or LA 'Project' tough. I mean proper tough.

The child malnutrition rate (moderate and severe) here is at 27%, literacy at 47 and 31% (male and female, respectively), and 51% of the population is below the international poverty line of $1.25 per day. A recent rebellion, followed quickly by a coup d'etat and a saturation of the north by Islamist terrorists, has exacerbated this poverty-stricken country's existing problems, and created a new crisis of 400,000 refugees and internally displaced people. Now all the people have to look forward to is war and international military intervention.

Corruption, an eroding terrain, and the hangover from decades of colonial rule, have conspired to make this country the 12th poorest in the world.

This is perhaps all the more surprising given that this nation is the third biggest producer of gold in Africa.



In 2011, 43.5 tons of gold (worth $2.7 billion at today's spot price) were mined in this country. Now let's imagine that this nation were a Scandinavian-style democracy, with superb infrastructure and a socially egalitarian government. If this gold wealth could be perfectly redistributed then the GDP per capita of this country would increase from $668 to $837. That's 20% a year more for every man, woman and child in the country, and I can assure you that this would make an enormous difference to the lives of people here.

To continue the thought experiment, let's note that to achieve the same increase in GDP per capita in the USA it would have to produce 53,267 tons of gold per year, or about one-third of the total gold thought to ever have been mined in human history.

In other words, the poor African nation has a resource option available which (purely theoretically and in a utopian sense) could raise it's economy by 20% per year. The USA cannot do this, as its economy is at such an advanced level that further increases are exceptionally difficult to achieve: it's the law of diminishing returns. Therefore, when the US economy is in trouble, it resorts to silly things like quantitative easing and zero interest rates, and Europe does the same but throws in a self-imposed austerity vicious cycle nightmare for good measure. To reduce US debt by 20% one needs to devalue the US dollar by 20%; compare this to the gold-producing nation's brand of QE which is to dig the stuff out of the ground. The two approaches are not entirely dissimilar in more than one sense.

But I digress. The African nation sees nothing like these increases in GDP, of course, and I think we probably all know the reasons for this, so I won't dwell on them here. But essentially, the country is an an almost unique position in that it could theoretically raise its living standards by 20%, but is unable to do so because the greater majority of the profits from mining go overseas or are syphoned off through corruption. Therefore it gets about 5%, and this 5% is distributed extremely unequally.

By any objective standard this is unjust. I'm no goldbug, as is well known, but it is clear even to me that many central banks and wealthy individuals choose to store some of their national and personal wealth in gold as part of a diversified investment strategy. The Qatari central bank cannot get gold from Qatari gold mines (as they don't exist), and a Caymans-registered hedge fund cannot source its gold from the Caribbean. Fiat currencies are thus exported to impoverished, but gold-producing, nations in exchange for the yellow metal. As the dollar and other currencies devalue, the producing nations' inherent (albeit underground) wealth is effectively partly stolen: the (untrue) analogy with the Dutch buying Manhattan for some beads is apposite.

This fiat-backed resource grab is, of course, the same for oil. Only it isn't. Because, by a quirk of history (perhaps) the oil-producing nations of the Middle East have been largely able to profit from their natural wealth. They are therefore not in the position of being forced to continue to sell it. In other words, as the dollar devalues, and as ZIRP remains the flavour of the decade, the motivation for OPEC to drill more black stuff out of the ground decreases. There is evidence that this is already happening: there is simply no incentive for, say, Saudi Arabia to continue to receive $US in order to immediately trade them for non-performing treasury bonds. We're not yet at the point where OPEC members will start to overtly cut back on production, but I suspect we're not too far away. Regardless, they have the choice: their economies no longer need foreign currency.

This is not so for my poor African hosts. Their people are starving and, I'm sorry, but they cannot eat gold. They are not Qataris or Omanis or Saudis, so they cannot countenance leaving their resource (and the wealth of their future generations) in the ground. They need fiat now. So the shiny stuff gets sold, the profits go mostly overseas, and a few scraps get thrown back at the owning nation. The people starve a little bit less, and the hedge funds and State Investment Funds and Central Banks get to preserve their wealth. The producing nation's inhabitants don't need to protect their wealth, because they don't have any. And as long as this perverted, egregious system continues, they won't ever have to worry about wealth preservation.

So next time you read a comment on the silverogosphere about the wickedness of the United States' wealth being shipped east to China, or the fact that citizens are being robbed by a devaluing dollar, spare a thought for my neighbour and his wife and his six children. He worked in a gold mine for fifteen years, but has never owned any, nor will he. He has no wealth to protect. And I imagine that he finds it rather difficult to conjure up too much sympathy for an insane financial system that plunders his country's hard assets in exchange for devaluing fiat, and then uses this resource to shore up the wealth of those on the planet who need it the very least.

Greed and Gold have always gone hand in hand. It's just that the financial system and world economy is now so ruthlessly efficient at sucking value from the productive and concentrating it in the hands of an increasingly tiny minority that Greed and Gold are essentially synonymous.

19 comments:

victorthecleaner said...


Just a few remarks:

If a CB or a wealthy individual wants to invest in gold "in order to diversify" as you say, there is no need for any newly mined gold. They can simply bid for some of the existing above-ground gold. Mines are not needed for gold's monetary function. There is already enough gold in the vaults. In fact, existing stock (>160000 tonnes) dwarves annual mine supply (2600 tonnes) about 60:1.

Conclusion: Gold is not a commodity.

Secondly, take a look at the oil price since 2002:

http://pbs.twimg.com/media/A3NTKbmCIAAFVnU.gif:large

Why has it been rising since 2002? (but not before - Brent was already around $30/bbl in 1979).

The answer is this:

http://pbs.twimg.com/media/A4QEtFHCQAAt5YP.gif:large

Gold has been rising since 2002, too. This is a consequence of the gold policy of the Euro zone:

http://www.ecb.int/press/pr/date/1999/html/pr990926.en.html

And the ratio gold/oil has been stable:

http://pbs.twimg.com/media/A3NSEVxCcAApghp.gif:large

It has been stable for two reasons:

1) The U.S. need gold/oil low - probably lower than 20 - otherwise it is no longer attractive for oil producers to request payment in dollars. This tells you why the U.S. are interested in a high oil price in dollars (it also helps them to develop their own oil resources and to become less dependent on imports).

2) With the rising gold price in dollars (thanks to the Euro zone), oil producers have no incentive to achieve full production any longer. Exactly as the Financial Times article explains. It is just that it took the FT more than a decade to admit their findings in public.

Victor

Jeanne d'Arc said...

@VtC: Thanks for the comments. Good observations, especially about the ratio of above ground stock to annual mining production. (Although as most above ground stock is sat doing nothing, and doesn't get sold, there's a far greater demand for new gold production than the above ground figures might suggest).

However, and I'm sure you won't be offended by this, I just cannot accept that the US wishes for high oil prices.

High oil prices choke the economy of any nation except those sitting on billions of barrels of the stuff. It's like carbon monoxide: once a certain level is reached, the blood cells can't get enough oxygen to keep going and the body dies.

I'm afraid I'm of the KD school of thought that high gold prices are neither here nor there for TPTB. A high gold price does not mean the dollar is going to haemorrhage confidence.

High oil prices, however... that's lethal.

Warren James said...

@Jeanne, beautifully penned. The last paragraph sums it up for me - when I cast my eye across the diorama of countries and people I see the wealth pump which strips people's livelihood. Finding the right party to blame is difficult but all the more frustrating since the world has never been a more richer, wealthier place.

In Singapore apparently over a quarter of the population are living with their parents - unable to afford the cost of housing (my uneducated opinion is that they are ones of the primary recipients of the US inflation exports).

In England there is apparently a rise in the number of stray cats as ordinary folk can't maintain the simple cost of having a pet.

Here in Australia we also get our fair share of corruption and waste. I remember a friend explaining to me a colleagues role in the department of agriculture in Canberra - his job was to watch videos of sheep at a trough, and count the sheep (the job continued for a year if I recall correctly). My tax dollars at work!

In this environment, even the savers and the debtors scenario that FOFOA paints, is irrelevant because if you can't save then you'll always be dependent on the very people milking you dry.

Anyway, my point of all this is that I fully agree. I also think your essay helps polarize some of the issues. There is only ever (a) real assets and the story of how they move and (b) social contract. The rest is fluff, smoke and mirrors - the unfortunate thing is that these days the social contract side has been engineered to such a degree that not many people can decipher the inner workings so they are unable to combat it. I hope this current state of affairs will not continue much longer, it is simply inhuman.

victorthecleaner said...


JdA,

Although as most above ground stock is sat doing nothing, and doesn't get sold, there's a far greater demand for new gold production than the above ground figures might suggest

Why is the velocity of the above-ground gold so low (in other words, why is most of the gold not for sale)? Some suggestions:
1) No surprise. It is held as long term savings. Emphasis on long term.
2) Perhaps the price is too low. Perhaps some of the holders would part with some of their gold if the price was higher (by this I mean the price in real terms, not necessarily the nominal price in dollars).

However, and I'm sure you won't be offended by this, I just cannot accept that the US wishes for high oil prices.

No, I am not offended indeed. I just think it is very naive to think so.

The U.S. have a track record of manipulating the dollar oil price high. They did this during the first half of the 1970s. The first step was to terminate gold convertibility of the dollar rather than raise the official gold price. Then, during the Arab oil embargo, Kissinger got the Shah to help him drive the price up. Even the Saudis didn't know this and figured it out only much later. See the Interview with Sheikh Ahmed Zaki Yamani in FOFOA's "It's the flow, stupid!" and "Flow addendum".

Why did they do this? The U.S. needed a higher oil price in dollars in order to make their own oil resources economically viable.

Then, think about the recent history since the introduction of the Euro in 1999. Do you think someone might be making a huge effort trying to prevent a number of countries from producing at full capacity: Iraq, Iran, Libya come to mind.

Victor

Blondie said...

”In 2011, 43.5 tons of gold (worth $2.7 billion at today's spot price) were mined in this country...If this gold wealth could be perfectly redistributed then the GDP per capita of this country would increase from $668 to $837.“

The gold has zero production cost?
Without the technology developed, provided and utilised by the mining companies, would these gold reserves be viable at all?
Without its “greedy” buyers how much would gold be worth?

Jeanne said: ”the financial system and world economy is now so ruthlessly efficient at sucking value from the productive and concentrating it in the hands of an increasingly tiny minority“

but her profile says: ”I'm interested in increasing my wealth through trading“

Warren said: ”I see the wealth pump which strips people's livelihood. Finding the right party to blame is difficult“

Warren James said...

@Blondie, I want first crack at what you’ve pitched; essentially as a moral dilemma. I think the only answer is ‘morality is relative, always’, but bear with me as I attempt an explanation – as I have given this careful thought in the many months since asking those questions on your blog (after this I will bow out of the discussion as this isn’t my article and this may be slightly off topic). FWIW, I would argue the use of ‘Gold’ in Jeanne’s narrative is country-story-specific; the same thing (but worse) happens with gemstone mining.

I sometimes visualize all of humanity on a one-dimensional sliding scale of relative wealth – I am possibly somewhere in the middle and for this I’m lucky. Individuals are moving up and down the scale relative to each other, all the time and in different contexts. With savings in gold (I don’t have any), I imagine this has frozen my position on the string, and I see my close neighbors and friends sliding down below my reach due to all their assets being devalued by inflation – I can’t help them because they choose not to see or simply cannot – after all who can see things that are invisible to the eye or simple to explain?

I can choose, if I want, to advance my position on the string but if I’m doing that at others expense then I am merely pushing people aside on my way up the top of the ladder and generally speaking that is an immoral thing to do (exploitation). The question is – where does one stop in the classification? If you decide to run a business will you decide that your suppliers are underpaid and pay them more, and if so where do you stop? Even as a consumer, will you not purchase a cheap t-shirt to clothe your family because you know that some Chinese guy got paid $0.10/hour to produce it? Will you forgo clean water because you know that billions do not have it? Will you as a saver, not buy gold because you know that somewhere in some country a worker was grossly underpaid for the extraction through a process you had no direct involvement in?

My general point is that for better or for worse, we are all plugged into this system of inequality, waste and corruption. That’s not to say that we should not fight it, but we should be clear about what we are fighting and about our resources we fight with. So my words were well chosen – finding the right party to blame is difficult, sometimes there is no single individual or group. But what’s clear (to me at least) is that the person who chooses to save the wealth they earn, is doing nothing wrong and that saver is not morally responsible for all the folk positioned under him on the ‘wealth string’; and things as they are, reducing inequality requires a dismantling of the current system we have – those who do instigate the abuse know how to pull the strings very well.

Lord Sidcup said...

"reducing inequality requires a dismantling of the current system we have"

The current system is doing a wonderful job of dismantling itself.

Hard to say what will follow (unless you're fellow Fofoan – a group who's certitude I find mystifying and almost cult-like).
But I think it unlikely that those who suffer most from unequality will get much of say.

But I do love reading FOFOA – I feel very rich and yes, greedy as I read – mentally calculating what my stash is worth.

It may all be a wish-fulfilment and fantasy, or maybe not, but I find myself day-dreaming about the 'inevitable' hyper-inflationary collapse of society.

milamber said...

JdA,

I am not sure where you are going with this. Is the contention that Madagascar has issues because of mining & colonialism? Or is it because people who want gold are greedy?
Or are you railing (quite well I might add) against a system that forces one to save in what they transact in as opposed to separating those "moneyness" functions out from one another?

Also, can you clarify the "you can't eat gold" comment. I know you aren't suggesting they eat fiat. So are you asking why doesn't gold fetch a higher price?
Or something else?

Milamber

/SleepingVillage/ said...

Sure you can eat gold!

That's some heavy shit, man

Seriously though, it drives me nuts when I hear people say "you can't eat gold"

No shit

mr pinnion said...

Fiendishly Cunning Comment of the month, goes to Blondie!

VTC/Blondie tag team
Thats some serious shit.

Regards
Ozzy

Jeanne d'Arc said...

Sigh.

Jeanne d'Arc said...

Do you think someone might be making a huge effort trying to prevent a number of countries from producing at full capacity: Iraq, Iran, Libya come to mind.

No. I work on the world stage and all I see is a huge effort to get production up to full capacity.

The gold has zero production cost?

Of course not. It's a theoretical exercise - a thought experiment. I'm talking about the theoretical wealth (in the ground) available to that country. You might just as well have said that Mali is not a Scandinavian-style democracy. I'm aware of that too.

but her profile says: ”I'm interested in increasing my wealth through trading

I missed the bit in my article where I claimed that I was somehow separate from the mess of the Western capitalist model.

I find myself day-dreaming about the 'inevitable' hyper-inflationary collapse of society.

I don't want to be rude, but I think you should probably stop reading online blogs and take a long hard look at your life.

Can you clarify the "you can't eat gold" comment. I know you aren't suggesting they eat fiat.

They can't eat gold, and they can't buy (for Mali read 'import') food with gold. To buy food they need foreign currency. The foreign currency they get devalues, however, as does their national wealth in a way (as their gold reserves get used up - forever).

When I cast my eye across the diorama of countries and people I see the wealth pump which strips people's livelihood. Finding the right party to blame is difficult but all the more frustrating since the world has never been a more richer, wealthier place.

Thank you, Warren. Precisely.

S Roche said...

In your thought experiment about the theoretical wealth of the country gold is only one example and is in no way the cause of the blockage between theoretical and actual wealth of the common people.

In fact, gold is not even a good example as it is the most malleable of all metals and can be bought in small amounts, even grams and milligrams (wire) and therefore is a safe-guard against devaluing currency for any amount of savings. So, there is obviously a lack of education, which goes without saying, but also the lack of social tradition of hoarding gold per Asia and India.

For further examination of the real issues I would recommend Dead Aid by Dambisa Moyo and for a decent scandal, rather than this strange singling out of gold... http://www.bloomberg.com/news/2012-08-28/poor-in-india-starve-as-politicians-steal-14-5-billion-of-food.html

Nickelsaver said...

JdA,

I think I get where you are coming from. It is like saying that, Freegold ain't coming soon enough. And that the current political environment is depleting this resource that might otherwise be used to raise SOL.

Of course, the inequity would be true regardless if that resource was gold or something else. It could just as easily be oil, or coal, or kumquats.

Your particular indignation it seems, has more to do with the current political atmosphere in your country, than in an injustice in the gold/oil trade.

And this inequity is and shall continue to be a local problem that finds its resolution, not in the active moral adjustment of the operators, but in the passive resolution of the current paradigm. It hardly seems fair, but we haven't arrived yet.

LS,

In as much as the resolution of the current paradigm necessitates grand austerity for those of us living under the dollar, it will be a horrible time for most everyone that stands at a height lower than your average little giant.

You might consider yourself fortunate to be in the know regarding physical gold, but that is much different than wishing for this thing to take place.

Wouldn't it be grand if the process were to be as smooth as could be imagined? Personally, I don't see it going that way. So I neither wish for it nor fear its arrival.

Lord Sidcup said...

JdA

The title of the post is 'Gold as Greed' – I think the two things are connected.

Perhaps it is comforting for you to believe that greed and inequality are things other people – 'bad' people – create and you have no part of. Perhaps this is true, in which case i commend your pure heart and clean mind.

Owning gold and reading FOFOA triggers greedy thoughts and daydreams within me, just as wine makes me drunk.

Have you never had a greedy / unpleasant daydream?

Jeanne d'Arc said...

@Lord Sidcup,

Have you never had a greedy / unpleasant daydream?

Actually, now you come to mention it, there has been a bit of a recurring greedy/unpleasant dream haunting my nights recently, always centred on GM, the larger of his two gimps, and a jug brimming with Ovaltine.

But that's probably just me.

GM Jenkins said...

Ah Ovaltine, try some at bedtime tonight, and if you're like me, your recurrent nightmares may end
http://www.flickr.com/photos/carlylehold/7984214637/

Gary said...

'Finding the right party to blame is difficult but all the more frustrating since the world has never been a more richer, wealthier place.

Thank you, Warren. Precisely.'

Hmm, have a look at this link:
http://www.economist.com/content/global_debt_clock

That's approaching $50trillion of govt. debt worldwide. I'd not like to hazard a guess at the total amount of household/corporate debt, or unfunded liabilities.

Within a few years, all of this debt (which is worryingly held as an asset by the likes of pension funds etc) will prove to be near-worthless.

So, no, you're both wrong, the world is very poor, flat broke in fact, bankrupt, but it is just about managing to hide the insolvency at the moment. The last 80 years have been a myth, the next 80 will be a little more real.

Warren James said...

@Gary, For the last few days I have pondered long and hard on your assertion above about the world being poor. We're looking at it from different perspectives obviously, here's my tally:

- Let's start with Gold. Out there somewhere, there is 16 Trillion dollars equivalent of unambiguously owned wealth asset which is no man's liability. All that stuff is owned by someone.

- Same for property. In my city alone there must be half a trillion dollars worth of property which is an asset which someone owns directly or indirectly.

- Every day, hundreds of millions of people sit down to a meal of such quality that only kings and queens of time past had access to.

- Hundreds of millions of people have a horseless carriage which has been refined by tens of millions of man hours of research and development.

- We all read and write on the internet using devices that Nikola Tesla could not have even imagined in a wet dream, these devices are the sum product of hundreds of millions of man hours of development and mass production makes it such that even a 10 year old child can have this marvel as a play-thing.

- We are at a peak of drilling amazing amounts of oil from the earth where every barrel provides the equivalent productivity of 35 men working one hour (or whatever ratio).

- We have the largest working capacity labor force that the world has ever known - what's the count up to? 6.5 billion people? Not all of them can work, but if everyone was pitched into a productive effort then we would get amazing results. The advances in science and technology are enough for me, some amazing things happening there.

- We have machinery and techniques which can do in 1 hour what once took 10 years to do (generalizing, but very true - e.g. blasting cathedral-sized seams of iron ore in today's mass mining methods).

The last 80 years have been nothing short of breathtaking, the next 80 will eclipse this and take mankind to places we have never been.

Where I will agree with you is:

- The method of distribution is so fked up and biased that we're at the point where apparent liabilities bear no real resemblence to what is appropriate, and that the effect is tantamount to a kind of hidden slavery.

- We are no where near operating to our full capacity as Humanity.

- Something has to change in regards to the use and caretaking of natural materials. This will happen as a matter of course if the stupid moneyed interests just let bad businesses fail and allow the business cycle to complete.

But even when things do go bust and pension funds prove to be worthless and households pop etc, all that Gold will still be there, in the same amount, and all of it will still be owned by someone, so the question is really only about distribution and social mechanics.

Finding the right party to blame is difficult but all the more frustrating since the world has never been a more richer, wealthier place.