Warren

 Edward  Pollock  
October  6,  2009  
  The  value  of  gold  pertains  and  relates  directly  to  the  metal  
having  acceptance  as  currency.  Gold  finds  its  optimum  
value  when  it  can  be  used  as  a  currency  to  store  wealth,  
guarantee  paper,  or  effect  transfer  in  goods  and  services.  
  Perceived  or  functional  demand  for  anything  creates  
value.  Societal  culture  and  structure  will  dictate  what  has  
importance  be  it  a  baseball  card,  oil,  an  automobile,  a  
house,  or  labor  hours.  Value  can  be  transitory  or  it  can  
endure  as  gold  has  throughout  civilized  history.  
  Currency  translates  through  uniform  quantification  the  relationship  in  societal  
value  between  the  desirable  commodities,  services,  and  outcomes.  Both  complex  
and  all  but  the  most  basic  societies  need  currency  to  effect  the  transfer  of  wealth.  
Gold  provides  a  physical  foundation  point  in  currency  throughout  history,  
between  nations,  and  across  culture.  
  Integrated  and  global  societies  have  highly  complex  currency  systems  largely  
predicated  on  common  values.  Law,  stability,  and  property  rights  allow  people  to  
enjoy  the  benefits  of  a  fast  moving  multiplied  economy  with  a  high  velocity  of  
money.  Liberty  may  be  an  additional  component  or  its  presence  may  be  reflected  
in  the  rights  to  protection  of  property.  The  three  basic  precepts,  of  law  stability  
and  property  rights,  combined  with  currency  provide  the  very  basis  for  
productivity  and  most  importantly  these  conditions  foster  investment  and  
innovation  with  the  objective  of  societal  returns.  
  In  the  United  States,  unlike  many  other  nations,  value  may  be  found  in  
things  tangible  or  intangible  and  in  property  either  physical  or  
intellectual.  Investment  and  re-­‐investment  in  productive  enterprises  
result  in  economic  success.  The  four  pillars  of  economic  success  are  law,  
stability,  property  rights,  and  currency.  These  supports  are  critical  
components  of  advanced  economies.  
  However,  Law  property  rights  and  stability,  are  inherently  more  fragile  
than  perceived.  Politics,  culture,  war,  natural  resource  depletion,  
population  pressure,  mismanagement,  malfeasance,  events,  and  even  
collective  rather  than  objective  opinion  can  drastically  detract  from  the  
core  requirements  for  societal  success.  
  The  comfort  of  highly  functional  economies  provides  false  shelter  
and  harbors  erroneous  perception  in  security.  Therefore  as  the  
foundation  currency,  gold,  has  a  role,  in  all  types  of  economies  
from  the  most  basic  to  the  most  integrated.  
  By  political  objective,  the  correlation  between  gold  and  currency  
has  become  temporarily  more  distant  since  the  1970's.  Just  thirty  
years  later  some  banks  and  societies  are  moving  back  towards  the  
fundamental  of  gold  today.  A  short-­‐lived  politically  biased  counter-­‐
trend  does  not  represent  a  speck  of  time  in  relation  to  the  history  
of  gold.  
  Worldwide  political  objectives,  as  well  as  cultural  experience,  are  not  congruent  
or  unified  to  common  interests  defined  primarily  by  western  thought  and  
influence.  It  can  be  definitively  said  that  interests  are  currently  trending  apart.  
Gold  will  become  more  valuable  as  currency  in  a  predictable  long-­‐term  enduring  
countertrend.  History  speaks  to  this  and  it  will  outlast  us  all.  
  Today  specific  economic,  political,  regional,  and  international  circumstances  have  
the  propensity  to  drive  a  stronger  correlation  between  gold  and  its  role  as  
currency.  
  Both  mainstream  and  outlying  contingencies  can  and  will  drive  gold  to  become  
more  attractive  as  currency.  Therefore  a  portfolio  that  has  a  percentage  weight  in  
gold  proportional  to  the  probability  of  specific  circumstances  will  be  well  served.  
  Finding  that  proportional  level  of  gold  to  probability  of  circumstance  presents  
some  challenge.  However,  and  in  general,  the  level  of  gold  holdings  per  capita  
needs  to  be  much  higher  to  adequately  reflect  the  probabilities  in  which  its  
application  would  be  useful.  
  Inflation,  in  a  paper  money  system  or  fiat  money  system,  has  to  be  considered  
part  of  the  normal  range  of  economic  activity.  If  the  economy  were  trending  to  
inflation  gold  would  rise  inversely  to  unsecured  paper.  The  value  of  gold  stays  
constant  while  the  currency  devalues  as  it  loses  purchasing  power.  
  Central  banks  have  spent  much  of  their  efforts  curtailing  inflation.  The  pariah  of  
inflation  has  been  the  watchword  of  every  central  bank  simply  because  inflation  
inherently  exists  in  unsecured  paper  money  systems.  
  War  also  provides  potential  accelerants  to  inflation.  I  make  this  
statement  with  the  caveat  that  for  structural  reasons  this  may  not  
apply  in  total  to  the  present  circumstance  in  the  Untied  States.  
  Gold  provides  a  natural  hedge  against  this  normal  and  mainstream  
economic  contingency  of  inflation  yet  few  people  hold  even  1%  of  
their  portfolio  in  gold  to  offset  the  high  probability  of  inflation  
over  time.  Most  people  are  totally  unprepared  for  the  mainstream,  
recurring,  and  relativity  frequent  contingency  of  inflation.  
  Presently  I  believe  the  globe  may  be  in  a  period  of  "stagnation-­‐deflation".  "Stagnation-­‐deflation"  
implies  that  a  mix  of  deflation  and  inflation  are  present  in  a  slowing  economy.  Both  an  economic  
boom  and  "stagnation-­‐deflation"  represent  outlying  economic  events  one  deviation  outside  the  
norm.  ""Stagnation-­‐deflation""  provides  opposite  traction  to  the  dislocation  of  a  boom.  
  In  "stagnation-­‐deflation"  returns  that  can  be  derived  on  investments  trend  lower  therefore  gold  
appreciates  because  the  opportunity  cost  for  holding  gold  decreases.  Simply  put,  more  people  
want  to  hold  gold  to  offset  uncertainty  and  holding  gold  does  not  cost  much  because  alternate  
investments  do  not  provide  meaningful  returns.  Perhaps  after  adjustment  the  United  States  will  
correct  to  the  normal  economic  range.  However,  political  interests  are  reticent  to  allow  an  
adjustment  to  occur  to  take  the  energy  out  of  a  corrective  force  so  in  the  near  term  therefore  the  
US  could  shift  to  a  more  severe  outcome  as  the  potential  energy  of  chronic  and  structural  
imbalance  compound  rather  than  release.  
  Unless  the  currency,  stock,  and  debt  markets  shift  to  sustainable  levels  and  valuations,  and  in  the  
process  wipe  out  wealth,  the  probability  of  the  "worst  case"  scenario  increases.  In  politics  the  "art  
of  the  possible"  in  pleasing  a  constituency  has  much  to  do  with  short  term  perception  rather  than  
need  or  circumstance.  Gold  has  absolute  neutrality  to  politics  and  it  has  an  incredibly  long  time  
horizon.  
  I  qualify  these  "worst  case"  events  as  two  standard  deviations  away  but  that  does  not  mean  that  
they  are  not  probable.  War  and  structural  imbalances  such  as  deficits  can  drive  a  bad  situation  to  a  
worse  outcome.  
  Where  do  we  go  from  here?  We  can  go  into  a  recovery,  which  would  bring  us  into  a  normal  
economic  range.  Inflation  is  one  of  the  possibilities  because  the  economy  would  bounce  off  a  
higher  money  supply,  as  the  velocity  of  money  would  increase  through  accelerated  economic  
activity.  Gold  speaks  directly  to  the  inflation  potential  of  this  outcome.  Or  we  move  to  outlying  
contingency  two  standard  deviations  from  the  mean.  
  The  two  extreme  potentialities  are  hyperinflation  and/or  a  liquidity  trap.  
  A  liquidity  trap,  depression,  zero-­‐bound,  call  it  what  you  want  circumstances  become  so  
unpleasant  that  Gold  might  be  the  least-­‐worst  option.  Gold  becomes  a  Hobson's  choice,  "no  
choice  at  all."  Gold  as  currency  thrives  in  inflation  therefore  hyperinflation  would  also  drive  gold  
towards  the  role  of  currency.  
  In  either  worst  case  the  risk  of  confiscation  of  gold,  government  intervention,  or  command  of  the  
economy  increases  because  of  social  considerations.  A  question  to  ask  would  be  whether  or  not  
government  tends  to  reward  the  individuals  who  are  making  the  best  personal  economic  choices?  
  What  is  the  likelihood  of  these  probabilities?  Would  these  contingencies  warrant  one  percent  of  
one's  investments  to  be  in  gold?  What  measures  can  be  effective  in  diversification  both  to  gold  
and  in  relation  to  gold  holdings?  
  Presently  the  United  States  stands  engaged  in  a  war.  Gold  also  
finds  its  value  as  currency  because  war  represents  a  major  
uncertainty  and  it  can  cause  rapid  dislocation.  
  Whether  or  not  people  in  the  United  States  believe  that  Gold  has  
value  today  many  cultures,  central  banks,  and  individuals  are  quite  
convinced  that  gold  provides  utility  as  currency.  Unfortunately  the  
common  call  to  any  asset  class  usually  means  that  the  best  time  to  
enter  has  been  exhausted.  With  objective  consideration  gold  
deserves  to  be  present  at  appropriate  levels  as  part  of  any  
portfolios.