Folks might enjoy this New Yorker article on Bridgewater Associates, supposedly the world’s biggest hedge fund. The founder has an unusual management style, e.g., “One rule of radical transparency is that Bridgewater employees refrain from saying behind a person’s back anything that they wouldn’t say to his face” leads to inviting a worker into a conference room where top managers discuss whether or not he is qualified for a promotion.
The founder, Ray Dalio, has some interesting ideas about investing, e.g., “One says that, over the long run, the price of gold approximates the total amount of money in circulation divided by the size of the gold stock.” (i.e., since the world keeps getting richer, gold will keep going up, up, up (though at any moment it might be mispriced))
The article doesn’t have a lot of practical advice except maybe to avoid holding assets in U.S. dollars:
Dalio believes that some heavily indebted countries, including the United States, will eventually opt for printing money as a way to deal with their debts, which will lead to a collapse in their currency and in their bond markets. “There hasn’t been a case in history where they haven’t eventually printed money and devalued their currency,” he said. … “I think late 2012 or early 2013 is going to be another very difficult period”
You express some rather rum ideas in this post. E.g. “…since the world keeps getting richer, gold will keep going up…” That’s not what Dalio said – the amount of money depends, as he goes on to state, on how much of it governments choose to print. That has nothing whatever to do with wealth. My house in England is now worth (in sterling or dollars) nearly ten times what I paid for it in 1979 – but it is the same house, with 30 more years of wear and tear. I have not gained any wealth unless I sell my house, and even then I would immediately need to buy another so I would hardly be better off.
As for printing money in a way that leads to hyperinflation, Dalio is being charitable in not pointing out that the USA, among others, has already been doing this for some time. The strongest (perhaps the only strong) argument for the gold standard is that governments cannot resist inflating paper currency so that it eventually becomes worthless.
There was an article on Bridgewater in New York Magazine in April:
http://nymag.com/news/business/wallstreet/ray-dalio-2011-4/
And Dalio’s manifesto “Principles” is on the Bridgewater site:
http://www.bwater.com/Uploads/FileManager/Principles/Bridgewater-Associates-Ray-Dalio-Principles.pdf
What Tom Welsh said is spot on.
A few related points. First, the price of gold has risen about 9% annually since 1967 (market price, NYC). This implies 9% p.a. inflation by the quantity theory that Tom cites (correctly, imo).
The reason we haven’t “seen” this inflation is productivity improvements of (implicitly) about 6% p.a.
This implies that if this productivity machine stops (a good chance, in my opinion, for the West), we will actually see this “hidden” 9% inflation resurface.
Second point, a trader’s rule of thumb that I (lamely) don’t have the cite for is to expect stable gold price when fed rates are 2% above CPI, then for each 1% lower, gold goes up 8%. This would imply something like gold prices annual 20%+ nowadays, given circa 3% CPI (cf billion prices project at MIT) and roughly 0% rates.
Haha, economists are good at math.
The rule would actually imply closer to 40% p.a. for gold.
Gold has been closing above $1600/ounce for a few days now …
Gold going up so much, so fast, doesn’t make sense at all; it’s just another bubble waiting to burst not because of improvement in the economy, but because buyers waking up to reality. Why? The price of gold is going up because people are trading in gold vs. actually buying and holding onto them. Just imagine what will happen if gold stock owners start to call their broker and ask to cash out, or ask for actually gold bar delivery. There is simply not enough real god bars to meet the demand.
“since the world keeps getting richer, gold will keep going up, up, up”
True, though one could replace “since the world keeps getting richer” with “since we keep printing more money”.
this actually means the real price of gold stays the same, same, same.
Folks: I’m not sure that the rise in the money supply is quite as simple as governments printing more to “paper over” (literally) their runaway spending. If we believe in a paper currency then shouldn’t its supply expand as the world GDP expands? India and China didn’t need much in the way of money 40 years ago. Now they need to have money because they have more people and each person has a lot more goods and services to exchange.
[I’ve never actually understood how it would work to have a pure gold standard in a world economy where the GDP grows every year. Would we have to feverishly mine more gold in order to keep up? Or would the value of an ounce of gold in terms of goods and services keep rising? I guess that is sort of what Dalio is saying would happen if we assume that governments print money only to keep pace with a rising GDP (which of course they don’t!).]
Phil, taxes are a form of in your face theft foisted on citizens by government.
Inflation is a sly, hidden and almost impercetable theft foisted on citizens by government. For example, let’s say the US gov obligations are only $14 trillion. Tomorrow they could print $14 trillion dollars and pay it all off. But what would that do to the value of everybody’s money? How would you feel if you had saved up just enough to live your retirement at an assumed 2% inflation and they just went and did that? Your money is worth less because everything costs more, so you were just robbed. You can see by this chart then when the gold standard existed and the government ran big deficits, inflation went up big…it was a hidden tax and form of paying it’s debts.
http://www.usinflationcalculator.com/inflation/historical-inflation-rates/
Gold is a commodity of limited availability. Tying the value of your money to the value of gold is a means of taking away a form of government taxation/theft.
The availability of gold isn’t fixed, it increases by approximately 2% per year(ironically the “target” inflation rate”) http://www.galmarley.com/framesets/fs_commodity_essentials_faqs.htm
And why is gold the standard, or should be the standard? What’s so special about gold? If the US tomorrow finds tons and tons of gold somewhere in Alaska (yeah right) can it write off all of its debt and yet maintain its $$$ value?! Will the US become rich again overnight and no one living on food stamp anymore?!!
Gold *had* its value when society was still developing and Kings used gold to define power over its citizen and other nations. Today, it’s **productivity** that’s worth in gold. A nation that sees its society is prospering vs. keeping them in the slump by giving them free gimmicks and false promises, is the nation that has tons and tons of gold — in its society.
1. Dalio is right, and some time in the future the Treasury Dept. and the Fed will find themselves at loggerheads, one printing money to relieve public debt burden and the other trying to keep the U.S. dollar price level stable. In such a scenario, hard commodities may be a good store of value for a hedge fund. Doesn’t mean they’re a good value store for Dick & Jane.
2. Tethering U.S. currency to gold is no more sensible than fixing exchange rate between dollars and any other asset or currenty. Eventually economic reality changes the fundamental relative value, and the fixed rate is a distortion. World gold stock is stable: amount in existence is large vs. amount produced & destroyed over time. But as has been pointed out, currencies must grow as economic activity does, to satisfy demand for a convenient unit of exchange. (Read “Moneymakers,” by Ben Tarnoff.) A fixed exchange rate would become a distortion much sooner than later. Like it or not, protection of the U.S. dollar must in the long run be by political device, and we have little choice but to rely on the Fed with eyes wide open to the risks.
3. If one fears U.S. dollar devaluation (and I do), then where to invest? Yuan exchange rate is fixed. Euro faces likely devaluation as well; witness Greece, Italy et al. World currency devaluation argues for higher commodity prices, but at this stage, who doesn’t know this, and is the knowledge priced in?
For myself I am delegating the decision to managements of large, multinational, dividend-paying, consumer staple producers, by buying their stocks. They manage currency, commodity and political risk every day, produce relatively reliable earnings roughly reflecting general economic growth, and yield regular cash to their owners. That’s my best thinking to avoid getting poor quick.
@philg,
To answer your question, the price of gold would keep rising, meaning that prices would fall (deflation).
Deflation was the normal state of affairs up until fiat money, and the renaissance and industrial revolution all happened in a state of endemic deflation.
The modern notion that deflation is a bad thing is PR concocted by central banks with a dog in that fight.