China urged to develop gold market for asset protection, not speculation

Section:

By The Mogambo Guru
(a.k.a. Richard Daughty)
DailyReckoning.com
Monday, November 29, 2004

Alert reader Jim E. sent me a New Yorker article by a
guy named James Surowiecki who has written an
interesting article: "Why Gold?" Jim thought the guy
was the "dumbest SOB that ever lived" and of course
I was excited to hear about a guy who was a bigger
and dumber SOB than me!

So I go to the link that Jim provided and was sped to
the very article to which he referred. I never heard of
this Surowiecki guy, and I assume that it was some
dumb filler by a new intern or something, but it was
an interestingly told but old story with a distinct bias
about how gold is just a metal, and when you buy
metal you are not investing in plants and machinery
and production, and how gold is the ultimate in
speculation and blah blah blah.

He deems belief in gold as "a testament to the
tenacity of popular delusion. What is gold, after all?
Strictly speaking, it's a commodity."

Well, duh!

He then goes a step over the line when he dismisses
me, as "Gold bugs are classic cranks." Although he
did not mention me by name, if you read between the
lines you could easily tell that he WAS talking about
me! The bastard!

The dispiriting thing is that he makes some valid points
about gold.

For example, "Gold's buying power has plummeted," he
says. "In 1980, 10 ounces of gold would have bought you
a nice car. Today it would get you a nice bike."

I don't know where he buys HIS bikes, but around my
house we don't spend $4,450 for no stinking bike,
especially when there are so many perfectly good free
bikes just sitting, abandoned, in neat little rows next
to schools and playgrounds! Weird, huh? (I figure it is
part of some space alien thing or another. My warning
is, "Watch the bikes!")

But I am not going to begrudge the guy just because
he can afford fancy-schmancy bikes, while I am on
this pink My Little Pony bicycle that is four sizes too
small for me but that does have this handy little white
plastic basket in front, and featuring a smiling pony
with a rainbow-colored mane.

But with a slightly different perspective, Peter Brimelow
and Ed Rubenstein of CBSMarketWatch.com write,
"The remarkable thing about gold is that really has
been a store of value. Adjusted for inflation, a dollar
invested in gold in 1801 has fluctuated around about
a dollar ever since. For now, the point is that, on the
evidence of these charts, gold is hardly overvalued."

And from the look on The Mogambo's face and the
way he is pounding the table trying to convince you
to buy gold, gold, gold, and silver, silver, silver, and
oil, oil, oil, there is also some evidence that gold is
waaayyyy undervalued. Both these guys are saying
so! And while we are talking about it, so is silver,
which has the most compelling fundamentals of any
asset on the planet.

But even Mr. Surowiecki admits, "So there's a little
bit of the gold bug in all of us." Then he goes into the
very reason to own gold:

"Still, in a world of 'swaptions' and strips, gold's allure
is increasingly atavistic. The idea of gold as a platonic
currency, universally valuable across time and space,
reflects a basic distrust of markets, a fear that in a world
of paper money wealth is just an illusion."

Yes! Yes! That's it exactly! Fear and illusion and
distrust! And don't forget treachery and bankruptcy and
ruination! That's the whole lesson of history of
economics! And if Mr. Surowiecki doesn't like it, then
that explains perfectly why he is writing in a leftist
newspaper, parroting the typical leftist dogma that
governments are to be trusted and that the Founding
Fathers were wrong when they insisted in the freaking
Constitution itself that money shall be ONLY silver and
gold! The guys who participated in the American
Revolution and created the freaking government did not
trust government, for God's sake!

Now everyone is looking at me and quietly arming
themselves with baseball bats and those damned
Tazer zappers because they can tell that I am getting
pretty wound up here, and those little tattletale
machines I am hooked up to are all going "beep beep
beep!"

With a mighty effort, a Mighty Mogambo Effort (MME),
I calm myself down, my brawny chest and broad
shoulders heaving mightily, and I take a deep breath,
flip the selector to full-auto, and shoot off a clip of
expensive bullets into a bush that is acting strangely.

Surowiecki goes on: "For gold bugs, paper money
turns us all into Wile E. Coyote -- we're running on air,
and we'll plummet once we look down and realize
there's nothing holding us up. The gold bug's
apocalyptic mentality maintains that someday the
global economy will look down and the result will be
chaos. Gold is the only thing that will still be valuable
after the bottom drops out."

Yes! This is it! Get this Surowiecki on the phone! Ring
ring ring! Damn. Nobody home, and he forgot to turn
his answering machine on.

So, if you see this guy, tell him that the Mogambo
says, "Yes! Exactly right. Mr. Surowiecki, if that IS
your real name! This is the reason that people own
gold! And it is the reason that ALL thinking people
eventually own gold too, because all that stuff you
talk about is what WILL happen, not only to Wile E.
Coyote but to us too, because that is what DID
happen ALL the other times in history, and that is
why I am so sure that it will happen again, just as
sure as I am that a fat dog will eat a hamburger!"

Surowiecki sums up: "One could say that gold is
the biggest, most durable bubble in history. Someday
even this one may pop."

With that he is also right. But that day is a long way
off, as we have not even gotten a good start on paying
penance for the economic sins that we have committed,
a particular circumstance for which gold is particularly
suited.

And we committed these economic and financial sins
against our own Constitution, against the laws of
economics, against all of economic history, against
common sense, and against the wishes of The
Mogambo, all of which proves that we are a
monumentally stupid race of people. And if you
examine the laws of nature, you will notice that she is
not kind to the stupid. In short, we deserve to be eaten,
so that others, who are more economically fit, from a
Darwinian perspective, may survive. And then, Mister
Smarty Pants Journalist, what are YOU going to do?

For the last 5,000 years in a row, all the people who
needed an answer to that question always came back
to gold, because there IS nothing else. But many will
come to appreciate that fact too, too late. Ugh.

-------------

Richard Daughty is general partner and chief operating
officer for Smith Consultant Group.

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