If I were an underemployed and thoroughly self-entitled crank, I could write three volumes of horrendously lugubrious prose and describe it as my theory of life, the universe and everything.* When not earnestly engaged with inseminating his domestic help, an underemployed and thoroughly self-entitled crank named Karl Marx did exactly that. He called this Volumes I – III of Kapital. Natter on for over 2,000 pages, and even a guy like Marx will bury an occasional intellectual ruby beneath the copious mounds of pony-poop.
In light of the “Gold-Apocalypse” occurring today on Wall Street, Marx’s plaint regarding Commodity Fetishism may well be worth donning a protective mask and digging out. It could as an explanation for why my full-bodied monies recovered from the 16th Century Spanish Galion just aren’t all that valuable any more.**
Marx’s actual prose is too turgid to cut and paste into a blog post, so I’ll summarize where I think Old Krazy Karl has a point here. Commodity Fetishism occurs when people assign a value to an object or product that is not related to that article’s physical utility. The teenage boy who sees The Marlboro Man and thinks that smoking Marlboro cigarettes will transform him into a sexual Tyrannosaurus Rex is a ridiculous example of someone who has been fooled into practicing commodity fetishism. That is, this fictional person has chosen to believe this particular cigarette brand has a supernatural ability to do something no cigarette could possibly accomplish and is therefore spending money for something he cannot possibly receive. I tend to believe people who buy gold as a hedge against uncertainty in 1st World Economies are making a similar philosophical mistake.
Gold is sold as a way to protect the value of your wealth from economic uncertainty. In places such as Zimbabwe, where currencies can be debased and inflated to the point of failing to properly store value, gold may have a role as a safety-valve. In larger, more developed economies of the world, this doesn’t work because our economies are deflating, not inflating. The Euro isn’t necessarily turning into funny-money.
Instead, it is having the opposite effect of inflation and oppressing debtors, rather than creditors. If the Euro were the sort of currency a gold hedge was designed for, the Euro would be killing Germany and Holland rather than Greece, Spain and Cyprus. The ironic problem with the Euro is that it won’t inflate, and let people who ran up huge credit tabs repay them in devalued currency. It sucks when you have to pay back what you really and truly owe.
This is where commodity fetishism plays into the current downward spike in Gold Prices. People believed for a long time that Ben Bernanke was going to crush the dollar and that the Eurozone would collapse into a continent-wide Weimar Republic scenario. Neither of these things happened.
US banks had such terrible balance sheets that they’ve essentially taken all of this QE liquidity and used it to restore their fundamental soundness. The money hasn’t hit the street, and therefore its velocity remains pretty close to zero. Not many people are off to Vegas on spending sprees and few firms are hiring. Under these conditions, you don’t get a volcanic hyper-inflation. Instead, you get the cold, miserable, foggy deflationary afterlife from The Epic of Gilgamesh. The current economy is like a universe that doesn’t do big bangs. Gold can’t hedge you very well against terminal boredom.
However, some people have believed since the late 1990’s that the economic fit would violently collide with the current events shan. They also believed that Gold would spike upward in value in response to said existential economic crisis. Thus, that likelihood of an economic disaster in the mind of a perspective gold investor was subconsciously multiplied by the expected value of the upward spike in gold. This rough mental estimate became a price premium that said investor was willing to pay for an ounce of gold.
Gold dealers and mining companies acquired the metal for what it was actually worth. They bought in at or very close to the labor price to produce each ounce of gold. They then had an exceptional arbitrage opportunity based on the unrealistic beliefs some buyers held regarding the economic virtues of gold. They all profited to the extent that people’s beliefs about the economy greatly inflated what they were willing to pay for an ounce of gold. The dealers did well and the miners did well. As they say on Wall Street – “Two out of three ain’t bad.”
So what happens when no violence occurs and the economy sails into the Horse Latitudes of Cash on the Sidelines and Capacity Underutilization? Well, people start getting worried that they falsely assigned value to the commodity known as gold in a faith-based rather than a rational fashion. Things get ugly over at the cargo cult when a few months pass without any planes landing on the carefully prepared Potemkin runway. This sets up the market in that commodity for what happened when China’s economy slowed. PANIC!!!!!*&&#^$^$^!!!!
Gold will not protect you from all bad economic variances any more than Marlboro cigarettes will magically invigorate the libido of the young, human male. People are learning this the hard way. There is a lot of raw emotion and ignorant ink being spilled. This is understandable, because an awful lot of gold investors do not like the smell of napalm in the morning. Right now it is not the smell of victory. It’s more like the smell of Marxism. Unfortunately, the evil SOB is right this time that betting on Commodity Fetishism isn’t a very smart hedge.
*-At least until the estate of the Late, Great Douglas Adams hit up their intellectual property attorneys via speed dial.
**- I kid, but it would be cool for non-investment reasons to have a few Pieces of Eight locked up in my study somewhere…