The majority of investors that are attracted to gold are those that view the metal as real money. Money is a supposed to be a limited, scarce object that is not subject to the whims of human interference. But, to the dismay of true money believers, gold long ago lost the war of the modern evolution of the nexus between banking and government.
Right now, the overwhelming majority of the public, and even a large majority of investors, have no need nor use for real money. They are perfectly happy or at least fully apathetic within the unstable confines of fiat chartalism. Their views of money are shaped by conventional economics, where gold is simply an asset class. The primary motivation for investing in precious metals inside this view is some derivative concept of interest rates or “inflation”.
The primary means of gaining “exposure” to gold “prices” (not the physical metal) is the massive ETF GLD. Despite prospectus advertisement of being a physical metal fund, its investors largely have little interest in that at all. Instead, the ETF fits comfortably inside the modern views on gold – from hypothecation of fund shares (in creating shares to be used as short positions, something that is antithetical to gold as money) to the legal disposition and title to the actual metal in safekeeping at the various bullion custodians.
None of these non-monetary characteristics bother investors in GLD. In fact, the media consistently misstates the mechanics of the fund as it relates to these compulsions. The price of gold does not in any way influence the physical quantity of gold in the fund. If the underlying price, set by other market means, falls, selling GLD shares has absolutely no impact on the amount of gold held in trust. The physical stock (such that it may be) in the GLD trust’s custody is only related to the number of shares, regardless of whether existing shares are bought or sold heavily in either direction.
Yet, particularly in this latest selloff, we hear constant stories about how the falling price of gold has led to liquidation of gold, as if that was evidence of growing physical disdain and rebuke. That simply makes no sense, but it tells us a lot about how little the media and even GLD investors care about gold as real money. Again, to these people, gold is some far off, foreign market that is simply a means to obtain “uncorrelated” market risk.
What physical gold represents is the full means to discharge debt, and that it is in complete opposition to the modern mode of “money”. Currently, there are no banking systems that operate on a true money standard. What we call money today is nothing more than currency – itself a debt derivative of money. In a true money system, transfer of physical money completely discharges a debt or financial obligation. That obligation ceases to exist entirely and in all ways.
In the modern system of fiat charta, debt is only transferred in kind. When a bank lends currency to a person, it only changes one debt into another; from currency into a personal loan (mostly collateralized by some other “asset”). Payment of that debt in Federal Reserve Notes simply redistributes the debt back to its original state. The bank has not extinguished any debts, it has moved from one attached to a person back to one attached to the state (through the central bank).
Debt never leaves the system in a chartalist framework. Once that became true of the banks in general, the pyramid on debt and currency debasement was open for what we have seen since – asset and consumer inflation on a much, much larger scale.
There were two major “advances” in the monetary system along these lines during the 20th century, both of which amounted to cumulative defeat to the forces of real money. In the first decade of the 1900’s, particularly after the panic of 1907, leading into the creation of the Federal Reserve, the US gave in to the allure of universal currency. Then in the 1960’s the banking system grew into a wholesale money system, with interbank leverage as the primary means of marginal funding and growth. This type of evolution, particularly non-money leverage, is the key to modern banking’s systemic failure.
As much as there exists a backlash to “too big to fail”, there has been absolutely no legitimate means by which to express such dissatisfaction. In the years since systemic importance was established likewise by regulatory fiat, there have been calls to “defund the megabanks” by various activist groups in which they meant to have a large proportion of depositors pull their “money” out. The idea, simple as it seemed, was to crash the banks by denying them access to their “money”. If enough people followed through, the banks would not have survived, or at least that was the belief.
But that was a very 1930’s view of the banking system, inappropriate to one which is moneyless. If enough depositors had actually removed deposits from, say, JP Morgan, it would have accomplished little toward that goal. JP Morgan, in the loss of deposit liability funding, would have simply moved collateral to the Federal Reserve’s discount window or other monetary program to obtain substitute wholesale funding (assuming that JP Morgan couldn’t have sourced funding through private repo markets). As long as the bank has access to “usable” collateral (doesn’t even have to be its own) the deposit liabilities are frighteningly interchangeable with wholesale money sources. Depositors hold absolutely no sway over the bank.
This is in sharp contrast to traditional banks. IndyMac failed in July 2008 because of the exact process described above. Depositors grew nervous (Senator Shumer’s efforts notwithstanding) and removed enough marginal deposit liability funding. Where IndyMac differs so much from the bigger investment banks like JP Morgan is the proportion of securities as assets. IndyMac as mostly a traditional bank only carried illiquid individual loans on its balance sheet, unsuitable to collateralized borrowing. Therefore, the bank had no liquidity recourse to surviving a depositor “run”.
The Federal Reserve system, indeed all of the interconnected global financial system, today is all about financial collateral. It sorely favors banks that operate on a non-traditional basis, thus the largest banks are both investment banks and prone to perpetually gaining market share at the expense of depository “power”. That was the entire goal of fiat chartalism in the first place. Banks were keen to totally extinguish exogenous means of control (real money), while central bankers sought the ability to gain said control in the name of “our own good”.
Gold, then, used to be the standard of power. In a real money system, gold stands as that means of exogenous control. If bank “reserves” are real money then the system cannot withstand even marginal investor disapproval – there are no alternatives in bank reserves to real money. If bank “reserves” are, alternatively, state controlled forms of debt, then banks can do whatever their central bank masters allow (though in this current captured regulatory atmosphere, it is not at all clear where the line between bank and regulator actually lies, and thus who is actually in control).
In that regard, then, the only means of corrective measures are political. And again, the monetary evolution was very careful in that regard, placing “independence” into statutory authority of central banks’ own individual and collective actions. Political appeals to dissatisfaction have been a woeful dead end.
Largely this political apathy is a function of exactly what I described above. Namely, investors don’t know any better – that currency is a poor substitute for money and gold should be much more than some kind of investment. The PhD’s that obtained full banking power and authority at the expense of real money are largely empty suits devoid of effective understanding of the system they aim and proclaim to control with ease.
This all sounds extremely defeatist in the face of the gold smash in April and the relatively low “prices” seen since. But central banks and their constant interventions and manipulations are actively highlighting exactly these types of drawbacks to chartalism. When central banks engage in “extraordinary” measures, the majority of investors appeal to gold “prices” as a hedge against expected inflation. Again, those are misplaced expectations and not the true appeal of gold itself. It has nothing to do with inflation; it has everything to do with expected failure. Central banks cannot solve the structural economic problems that they themselves created with their hubristic manipulation of their own chartalism.
In other words, the longer the European economy, for example, lingers in the grips of depression while the ECB flails against the elimination of “tail risks”, the system begins to reject such impotence. It comes in the form of financial instability, or volatility to the financial ear. That was 2008; the system trying to reject unstable “money”. The more the ECB and its compatriots fail in their primary mission as the public understands it, a stable and healthy real economy, the more the desire to re-establish exogenous power methods grow.
Gold, then, is not captured solely by inflation or interest rate differentials. The media will continue to revel in its own ignorance with tails of GLD “liquidations” of distraught gold investors. It is far bigger than that, though in shorter time frames these ineffective and irrelevancies can seem to ignore it. As much as gold prices can react on the basis of liquidity and collateral, the longer desire for gold is the inevitable rejection of all that fiat chartalism has created – terminal asset inflation and instability in the real economy. Gold is about power; should it reside in the hands of central banks or markets?
While the last war in the evolution of banks was lost by the forces of sound money, that may not be true of the next war, particularly as it has yet to be settled. Central banks are their own worst enemies, currently aiming to instill as much instability as they can possibly and intentionally enforce. The issues of gold relate far more to the awakening of investor sentiments about being so powerless in the face of a financial system that only benefits the financial system. The long arc of prices, therefore, is connected solely to catching up to these existing incomprehensible imbalances. All of the rest is noise.
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