Exclusive Interview
Ned Schmidt on Gold, Oil, Farmland and International Investing
The Daily Bell is pleased to present this exclusive interview with Ned Schmidt.
Introduction: Ned W. Schmidt, CFA has nearly forty years of experience as a value oriented investment manager and researcher. He publishes the Agri-Food Value View, the premier investment newsletter on agriculture and food, as well as well as Agri-Food Commodities, a quarterly review of returns produced by Agri-Commodities. His investment activities have included management of $3.5 billion of discretionary portfolios serving individuals and retirement plans. Ned was the value editor for the Global Advisor published in Toronto, and successfully managed an offshore mutual fund for that firm. In his effort to save investors from financial abyss of paper money, he publishes The Value View Gold Report monthly and the weekly Trading Thoughts.
Daily Bell: Thank you for taking time to sit down with us. Tell us about your background. Where did you grow up and go to school?
Ned Schmidt: I grew up in Southern Illinois with something of an agricultural background. After the Army, and an all-expense paid year in a beautiful Asian location, I attended Southern Illinois University. From there I went to the University of Georgia for graduate school. My degrees are both in Finance and I am a CFA Chartered Financial Analyst.
Daily Bell: Give us some background on your professional career.
Ned Schmidt: My first job out of school was as the oil analyst for a major trust investment operation in Atlanta. They made me the oil analyst in January 1974 because oil was not very exciting. They were obviously wrong on that one, and I had to scramble to learn about places no one knew of like Saudi Arabia and Kuwait.
From there I went on to be a portfolio manager in Nashville, Tennessee. And yes, I did have some accounts, though small, for some famous people. Living in Georgia and then Tennessee gave me great appreciation for catfish and barbecue.
Then I was on to Tulsa, Oklahoma. There I became the manager for an investment management group. Investors in that region were interesting. Some made their money in the highest risk industry, drilling for oil and gas. However, their investments were far more conservative. They were interested in return of investment first, and return on investment second. They were also very global in their view. Many had worked all over the world in the oil fields.
Daily Bell: You are a financial engineer specializing in global capital flows. What does that mean?
Ned Schmidt: All markets are connected in some way. Money flowing into some market is coming out of some other market. When an investor puts money into a stock, that money is flowing out of the money market. The same is true on a global basis. The flows are just bigger.
For 20 years, where in the world money was flowing to and where it came from created opportunities. Today, one has to understand where the money flowing to China is coming from and where it will flow. Those flows give an investor more opportunities.
Thinking like a financial engineer means considering all the methods of building a financial bridge to the future. Many think gold will benefit from the growing wealth of China. Well, where is that wealth coming from and is that creating any more interesting opportunities? The answer is yes, in the form of the Chinese renminbi. China's growing economy means that the volume of transactions in renminbi is growing, and in general at a double-digit rate. An investor is likely to double one's money in renminbi in the next ten years, and that may be better than Gold.
Daily Bell: You've been an advocate and practitioner of value-oriented investing for 30 years. But if the market is efficient, then can value investing work?
Ned Schmidt: Market efficiency is a process not a state of being. The market is always moving toward pricing that fully reflects all known information. That does not mean on any single day the market is efficiently priced. The reason for that is new information flows into the market constantly.
Value investing recognizes that the information flow on an investment, say a company, can be negative for a long period of time. Value investing, through the use various financial measures, is assessing when that price probably reflects that negative information flow. The value investor then simply waits for the information flow to be less negative and the price of the asset to rise.
Daily Bell: What about the idea that 95 percent of gains are found in the asset class not the individual instrument (stock)?
Ned Schmidt: Which asset class to buy is clearly an important decision and one on which investors spend too little time. Those investors in the 1990s who chose precious metals over stocks have clearly won the race. Which gold coin they bought is not as important as simply buying gold. Further, picking assets classes is a lot easier than picking stocks.
Now, consider the situation today. Bonds have been in a bull market for 30 years, and yields have been driven down to totally irrationally low levels. Bonds as an asset class are screaming sell. Those invested in bonds today are going to lose a tremendous amount of money.
Daily Bell: In the 1980s you were manager of an investment management group with discretionary responsibility for about $3.5 billion. What was that like?
Ned Schmidt: That experience was like going to graduate school ten hours a day. The investment world was making a major transition to a new set of investment ideas. We bought some stock, though no one really got many shares, in Genentech's IPO. That company was a whole new investment concept.
New techniques were becoming acceptable. We ran one of the few hedged equity funds that turned in positive double-digit returns in 1987. The whole idea of using derivatives in portfolios for regular investors was just developing.
And then there was the computer. I bought the first portable computers the institution owned. New MBAs working for us were invaluable. They were the only ones in the building that knew how to use them.
The job itself? Call it stress on steroids.
Daily Bell: You also taught institutional investment management as the Roland George Visiting Professor of Applied Investments at Stetson University. Did you teach value investing?
Ned Schmidt: The Roland George program at Stetson was one of the first in the country to create a fund managed by the students. Roland George was an interesting man. He believed that failure could be an important learning tool. Of course, everyone wanted the students' ideas to work but the goal was for them to learn from doing analysis and seeing the consequences of their decisions.
We used a value approach to a large extent, as it focused on financial statement analysis. That approach to investing begins with the numbers, and understanding those financial numbers is important. Still today I see Street analysts who really do not understand how financial statements work.
We also emphasized thinking about the future for the companies in a realistic and pragmatic way. I wanted them to learn to never worship a company. All managements and companies will have good and bad periods. I taught a lot of disrespect for managements.
Daily Bell: You publish The Agri-Food Value View and The Value View Gold Report. Tell us about these publications.
Ned Schmidt: I have written on gold since the mid-1990s. That effort ultimately became The Value View Gold Report. This effort is analytical, treating gold as an investment not a religious icon. If it has a goal it is to avoid all the emotional nonsense that is so prevalent in that which is written on gold.
Agri-Food Value View is in many ways an educational tool for investors. Agriculture is a complicated topic on which most investors actually know little. Most investors have never actually walked in a cornfield or driven a tractor. The entire spectrum is covered from the Agri-Commodities to Agri-Equities to Agri-Land. The readership is even more global than the gold letter. About half the readers are outside North America, from Singapore to Romania.
Daily Bell: Is farmland a good investment? Why?
Ned Schmidt: Farmland is a unique form of real estate. A building can be built on almost any type of land. Not all land will produce food. A building can be built in the desert. But one would go broke trying to grow wheat in the desert.
Farmland is land where the dirt is of the kind in which plants can grow. It also must receive sufficient rainfall to grow those plants. Land that meets those two requirements is actually limited, and becoming rarer in the world.
The demand for the crops, from corn to tomatoes to beef to apples, is growing faster than the productive capacity of the world's existing farmland. That demand is fuelled by the increasing needs of China and the developing world.
All of that uniqueness should allow land values to rise. At the same time the land produces a cash rent for the investor. As the price of Agri-Commodities rises that cash rent should also rise. A nice feature also is that the value of the land does not have the volatility of market-traded assets. The value is not subject to the daily whims of those in the trading world.
So yes, I like farmland a lot. The problem is that it is difficult to buy. To buy a good piece of farmland might take months to accomplish. It is also bulky. Minimum investment starts at a quarter of a million. And so many kinds exist that investors need to do a lot of research. Twenty minutes on the Internet will not do it. At the present time Midwestern US cropland prices have been bid to excesses, and are likely to be stable to slightly down for the next few years. Pastureland is probably the type some investors should be considering. It may have more potential.
Daily Bell: Is gold finished, or will the price continue to rise?
Ned Schmidt: Gold has finally secured a place in the investment world it has never had. For the first time in modern history gold is now part of mainstream investing. Gold is in most asset allocation models today. All of that means that the amount of gold to be owned by real investors, not traders, will rise over time. So gold is not finished. However, those looking for a price explosion to ridiculous levels immediately are going to be disappointed.
I have no interest in silver at today's prices. Sell it.
Daily Bell: Are the 2000s like the 1970s?
Ned Schmidt: Every decade seems to have a unique set of risks and opportunities. The 1970s were about the crash of the Nifty Fifty and the explosion of oil prices. The latter changed the world in a dramatic way, a near total break with the economics of previous years. Today the change is the shift away from debt that is developing. Traumatic but different.
Daily Bell: Okay. Let's ask some more general questions. Is the state of the world better or worse economically than it was a few years ago after the crisis of 2008? What's driving the world today? War?
Ned Schmidt: From the 1930s until 2008 the attitude was that the world could never have too much debt. Debt was the route to wealth and prosperity. The world lived the Keynesian myth.
The private sector has learned that debt is not the route to prosperity. The value of their real estate reminds them of that every day. Individuals have developed an aversion to debt. People want to pay off credit cards, not get another one. This move by individuals to deleverage themselves is far from complete. As they direct income to debt reduction rather than increase debt to buy stuff, the basic growth of the global economy is worsened. However, the risk level in the private sector is declining. So in the private sector the state of the world is getting better because they are reducing risk, and have done so much to reduce debt. This source of economic drag will continue but at the point that consumers are satisfied with their debt levels their income will be directed toward spending.
The problem is in the public sector. In Europe and much of the US the attitude continues to be "why work when one can vote?" Politicians still want to use government spending to buy votes. However, those being taxed to support those who do not want to work are starting to revolt. That is what drove the battle in the US election.
Those nations in Europe that have financial problems are demonstrating clearly that the Keynesian mythology is dead. Government debt and spending is not a road to prosperity. Roughly half the voters in the world know that. Ten years ago the public had no understanding of government debt at all. The size of total government debt is not yet shrinking but the trend is in that direction. In the short term all this makes the world more painful. In the longer run the turn away from debt will reduce economic risk and make the world a better place.
By the way, France is the next EU nation headed for the toilet. Investors should avoid that nation.
Daily Bell: Is there free trade in the world?
Ned Schmidt: Consider Europe. Due to the EU and the Euro zone trade, commerce, people and money now move between nations with minimal restrictions. Trade in Europe is freer than it has ever been in all of history.
Consider China. Prior to 1979 China barely traded with the world. They barely talked to the world. Today, trade with China is the global economy. The trade between China and the Pacific nations is gigantic, freer than in all of Chinese history.
The constraints on free trade are still political. Obama, for example, like every government leader in history has acted to protect his supporters with tariffs that interfere with trade. That will always be a problem. But any comparison to history would show that interference is lower today. Politics is what kept Russia out of the WTO, but it is now going to be involved in freer trade.
So I would say free trade is alive in the world but not free enough.
Daily Bell: What about the financial meltdown? Is it over?
Ned Schmidt: Meltdown? Yes, it is over. Now what we have is a small piece of ice sitting in the sun slowly withering.
Daily Bell: What's your take on gold and silver manipulation these days? Does it exist? Who's doing it?
Ned Schmidt: We can't print my words for the manipulation theory. Pure rubbish! Nonsense might also be applicable. Those pointing to manipulation generally have forecasts for gold and silver that never seem to happen. They need something to blame for their forecasting failures. Further, most of the talk is by people who are clearly ignorant of how markets for contracts for future delivery function. In that market, on an exchange or OTC, for every short a long must exist. They do not understand that simple reality.
Daily Bell: Give us an idea about the best investments for the next few years.
Ned Schmidt: My favorite at this time is the Chinese renminbi. Template for that view is the Japanese yen. In 1970 the yen traded 360 to the dollar. In 1995 the yen was at 80 to the dollar. Over those 25 years the value of the yen went up 350%, compounding at more than 6% a year. All one had to do is stuff that paper money in a shoebox and a nice return developed. The renminbi should appreciate by at least at 100% in the next ten years.
Daily Bell: What about some popular modern themes? Turns out that a lot of what we're told to fear is probably untrue. Update on how you see the global warming debate unfolding?
Ned Schmidt: Global warming was and is junk science. It has been so debunked the name had to be changed. Now the lunatic fringe uses the term climate change. The whole matter was about how to generate funding for university academics trying to avoid real work. Consider Florida, for example. By now we were to be ravaged on a regular basis by storms, and the water was to be now rising above our shore. Florida has not had a major hurricane in the past five years.
Daily Bell: Oil scarcity?
Ned Schmidt: Oil is moving toward a less scarce situation. The US, for example, has a surplus of natural gas not seen in decades. That will displace oil consumption in the US. The world is running away from consumption of oil. Every nation in the world is trying to find ways to use alternatives to petroleum, and coal and nuclear.
In the US, shale oil is changing the entire picture on oil. As the US reworks the delivery system oil will be increasingly abundant where it is needed.
Daily Bell: Water scarcity?
Ned Schmidt: Water scarcity is just starting to become an issue. Time is going to make the issue far worse. In China the biggest constraint on long-term growth is water. Forget all the other issues discussed. That nation is rapidly depleting its store of water and the water table is falling.
In the US the Ogallala Aquifer supplies nearly all the irrigation water to the Midwestern US. That aquifer is slowly being depleted. Usage of that water to irrigate will probably become highly restricted in 10-15 years. Most of the irrigated farmland in the US will ultimately be abandoned.
Hard to describe how bad the water situation is in India. Government subsidizes irrigation so the aquifers are being depleted rapidly and the water table is collapsing. Irrigated crops will become a rarity in India. The rest of the nation's water system is one giant ecological disaster. The water in the rivers of India could not be put through a sewage plant in the US; it is too dirty. It would have to be cleaned before it goes in a US sewage plant. Most of the nation does not have running, clean water 24/7. Forget global warming; the Indian water situation is the really big ecological disaster on the horizon.
The problem is how an investor takes advantage of the situation. Very few real ways to do so.
Daily Bell: Will the world come out of the current financial crisis with the current financial and economic system intact?
Ned Schmidt: No. The financial world is evolving into something new and old. Banks are going to be forced out of the risk businesses. They will have to return to being banks like we once had. They will have to make a living being nice to customers and lending them money. The new financial world is going to be a real shock to many bankers.
Daily Bell: Will the EU survive?
Ned Schmidt: Yes, and that issue was never real.
Daily Bell: How about the planned currency region of America, Canada and Mexico?
Ned Schmidt: When Hades freezes over.
Daily Bell: How's the war on terror going? Is it a real war?
Ned Schmidt: The war on terrorism is yesterday's issue. A far greater concern today is with Putin in Russia. He is a very real threat to the world. He will run Russia for the next twelve years. He is ruthless, gaining absolute power over the nation, and has visions of grandeur, for want of a better word. Putin is the most dangerous government leader to arise since the early 1930s.
Daily Bell: Is the US coming out of its slump?
Ned Schmidt: Yes, but very slowly. The US economy is being totally restructured. For decades the US economy was built on housing construction, buying and selling houses and financing that game. It ended. The infrastructure to finance that game has been destroyed and it will not return. Will take decades for the US, and several other nations, to consume the surplus of housing that now exists.
All those who earned their income from the housing-centric economy are now being forced to do something else. This kind of economic restructuring does not happen overnight. It takes years.
Daily Bell: How about Europe?
Ned Schmidt: The financial/political/economic restructuring of much of Europe is going to take years. Like I said earlier, France is next in the toilet. A decade? Probably, but now is a great time to buy a vacation home in Greece or the Iberian Peninsula.
Daily Bell: Is China going to escape recession? What if China becomes depressed as well? How will that affect the world?
Ned Schmidt: With China, investors spend too much time on national income accounts, like GDP. China had a construction boom that imploded and that along with the slowdown in orders from the US and EU are causing their economy to look weak.
But investors should be looking below the surface. An incredible amount of economic activity is taking place in China. China is adding eight movie screens per day. Per day! McDonald's is in the process of hiring 70,000 people. China is going to begin buying 50,000 school buses a year. They need to buy one million of them. SUVs are hot in China. Seems the soccer moms there like them, too. Yes, China has soccer moms and their kids love expensive shoes and cell phones and pads. I say forget the national income accounts. Look at what 1.3 billion consumers are doing.
Daily Bell: Thanks for your time.
Thanks to Ned Schmidt for an insightful interview. A lot to agree with here and a little bit to expand upon, as well.
He tells us persuasively that gold has "finally secured a place in the investment world it has never had. For the first time in modern history gold is now part of mainstream investing. Gold is in most asset allocation models today. All of that means that the amount of gold to be owned by real investors, not traders, will rise over time."
He also tells us that those who are "looking for a price explosion to ridiculous levels immediately are going to be disappointed."
We agree with the former statement but are not so sure about the latter. The financial economy is so stretched and seemingly delicate currently that it seems to us there is a possibility for bad things to happen quickly, which could have a powerful impact on gold ... and silver, too.
Schmidt is dismissive of silver, though we think the same fundamentals that have raised up gold (and silver) will continue to have an impact on both.
Silver's price has risen nearly tenfold, while gold has gone up about seven times. Yet the ceiling for silver − assuming you believe in the silver/gold ratio − gives us an even more promising outlook for silver than gold.
We also think Schmidt has a point about farmland and its rising value in a world where food and food crops, in our view, are being manipulated. There is seemingly an enforced scarcity taking place (we believe this is observable) that will affect both food and water − and those who have invested in farmland may well benefit from it.
It's simple, actually. The world is facing a massive inflation of assets based on all the money central banks have printed − trillions and trillions. Ned Schmidt is correct in his viewpoint about how all this will play out, at least from a purely financial view. But we think including silver into the mix makes sense as well.
Notwithstanding its status as an "industrial metal," silver has been "money" for thousands of years. Some things don't change.
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Posted by mava on 11/15/12 04:24 PM
I have overlooked one of your points:
BISCHOFF:
"For financial statements to be of any value, you have to record entries in one or the other measurement standard."
MAVA:
I don't think this is even an issue. American companies are buying foreign companies this very moment, and vice versa, even though the books are kept in different currencies, with their relative exchange rates constantly changing.
With both, gold and silver functioning as money, it is up to the company which one they want to use at any moment to record their financials. They can use which ever they want, even game points, it is only going to affect them and no one else. If you want to evaluate such company financials, it is up to you how to arrive at the statement you can understand and measure.
It is very likely, however, that most companies that want to be traded, will choose either silver or gold, as an unit of accounting and stick to it.
Correction:
(I am horrible at proof reading my posts)
The post below should have read:
BISCHOFF: What a question... !!! People are buying gold right now, because they realize that it is "money", meaning it stores value better than any other commodity in the world. Anyone who wants to save, should do so in the form of gold.
MAVA: Wrong answer. IF gold was OVERvalued against the FRN right now, the people would be buying FRN, instead. Even though the gold is money, and not FRN!
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Posted by mava on 11/15/12 10:16 AM
MAVA: "Why are the people buying gold right now?"
BISCHOFF: What a question... !!! People are buying gold right now, because they realize that it is "money", meaning it stores value better than any other commodity in the world. Anyone who wants to save, should do so in the form of gold.
MAVA: Wrong answer. Ig gold was undervalued against the FRN, the people would be buying FRN, instead. Even though the gold is money!
But, you already agree to it, later in your post: "Gold is probably the "cheapest" (most valuable) buy there is. If I were you, I'd thank god for the idiot that set the "price" of gold at 1,700. "
You don't need to be me, as I have stated that point originally: "... It should be about 50000! From here I simply buy the undervalued good... It's either they lose or I win... "
So, you prefer to say it as 1/50000 of an ounce of gold. Fine. It doesn't matter how you express it, I could not care less. The glass is half empty, half full... to me it all means 1/2 of a full glass. So, if you like to quote FRNs in terms of gold, be my guest.
You ask:"USD/FRN should be worth 1/50,000 of an ounce of gold. Is that what you want... ???" No, this is the reality already. One FRN is worth about 1/50,000 of an ounce of gold. All "I want" is for the time when it is widely acknowledged to come sooner. By the time the disclosure and acceptance happens, the dis-balance my accumulate further to set one FRN as 1/70,000 of 1 oz Au or even less.
BISCHOFF: That you quote the market "prices" in terms of government, debt monetized, central bank, irredeemable, legal tender currency evidently doesn't seem to bother you at all. LOL... LOL... LOL...
MAVA: Ha-ha. You are correct, it doesn't bother me, at all!
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Posted by Bischoff on 11/14/12 08:20 PM
@ DB
DB: "Be an oracle ... but understand that others may not agree."
BISCHOFF: I can accept that others may not agree with me. What's difficult for me is understanding the argument to express the disagreement. There is simple logic involved here.
I don't care if silver is used as "money", or gold is used as "money", but they cannot be both "money" at the same time. The ratio of the amount of "work" required to mine and refine specific quantities of each of the two metals is not constant, but instead varies. For financial statements to be of any value, you have to record entries in one or the other measurement standard.
You can't build a house by mixing up measurements in quantities of meters and feet, and expect the house to make sense. Do you see what I mean... ??? Use either meters through out the construction or use feet, but don't mix them. Have the "gold standard" or have the "silver standard", but don't mix them, if you want things to work. It's simple logic.
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Posted by Bischoff on 11/14/12 07:59 PM
@ mava
MAVA: "Value is not something you could measure for me, Bischoff. Value exist only in your subjective conscious mind. It is the measure of things you would be willing to exchange one for another. Say an ounce of gold for a flat screen TV. Or, may-be two ounces. It depends on how badly you need one and how much of another you have. I believe Mises had established this, and Gary North had an excellent write up explaining this."
BISCHOFF: I give von Mises and Gary North their due. However, I disagree with you about measuring value. What gives value to a good or commodity is human exertion or "work" expended to produce it.
The word "work" used colloquially describes exertion in general. It is even used to describe mere physical exercise by calling it a "work-out".
However, the word "work" in physics refers to something very specific, such as moving mass over distance. In physics, "work" is quantified and measured in "joules".
I am not arguing that "work" expended in the productive sector is tracked by way of "joules". I am however arguing that the "work" expended to produce a good extends value to the good which can be measured in terms of a standard, such as the amount of "work" required to mine and refine a specfic amount of gold. Therefore, the term "gold standard".
Any individual who expends work to produce a good does so for its "use value", evenso he may not plan to use the product himself. It stands to reason that no one would expend energy to produce something which no one would "use", not even the producer.
When a good is exchanged in a "money" transaction, the "use value" of a good or commodity is translated into an "exchange value" with the help of "money". In an exchange transaction, "price" is discovered via arbitrage in markets. The "price standard" exists by expressing the "exchange value" in aliquot parts of "money".
While the value of "money" can change (depending on "labor saving" devices), the standard of price does not change.
I believe that your attachment to von Mises' teachings prevents you from understanding the difference between "use value" and "exchange value". I suggest Carl Menger as a read on the subject.
"Value" is not as subjective as you make it out. The "use value" of a hot cup of coffee in the middle of winter and on a hot summer's day is the same. On the hand, the "exchange value" of that same cup of coffee differs greatly from summer time to winter time.
By expressing the "exchange value" of a good or commodity in terms of aliquot parts of "money" (ounces of gold), called the "price",
the amount of "work" is related to the "utility" of the good or commodity.
MAVA: "Why are the people buying gold right now?"
BISCHOFF: What a question... !!! People are buying gold right now, because they realize that it is "money", meaning it stores value better than any other commodity in the world. Anyone who wants to save, should do so in the form of gold.
MAVA: "Because the official rate is set! It is 1700+-200. And because it is set, it is wrong!"
BISCHOFF: That certainly is news to me. How was the official rate set... ??? Can you explain that to me... ??? I don't doubt that the "price" of gold is highly manipulated by trading "naked" contracts. (Google Bill Murphy's(GATA) testimony before the SEC on March 25, 2010).
Besides, talking about the "price" of gold as being 1,700 really does not make sense. Gold is "money", not irredeemable FRNs. It is one USD/FRN which is worth 1/1,700 of an ounce of gold. To clamor for gold to go to 50,000 really means that one USD/FRN should be worth 1/50,000 of an ounce of gold. Is that what you want... ???
Do you still wonder why poeple are buying gold... ??? Gold is probably the "cheapest" (most valuable) buy there is. If I were you, I'd thank god for the idiot that set the "price" of gold at 1,700.
MAVA: "Market is great thing, and it got there without any help from the government, contrary to any propaganda that the government may wants to spread."
BISCHOFF: You praise the "markets", and you lament government involvement. That you quote the market "prices" in terms of government, debt monetized, central bank, irredeemable, legal tender currency evidently doesn't seem to bother you at all. LOL... LOL... LOL...
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Posted by mava on 11/14/12 12:05 AM
Sorry, I meant "Because at the point of transaction of A-B, the party A has no knowledge of the party C."
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Posted by mava on 11/14/12 12:00 AM
Value is not something you could measure for me, Bischoff. Value exist only in your subjective conscious mind. It is the measure of things you would be willing to exchange one for another. Say an ounce of gold for a flat screen TV. Or, may-be two ounces. It depends on how badly you need one and how much of another you have. I believe Mises had established this, and Gary North had an excellent write up explaining this.
Price, is a set ratio of exchange one for another, which you either propose or accept. If you selling gold, you might say that the price of a TV is one ounce of gold. If I accept, then that is the price of TV in terms of gold and gold in terms of TVs.
At this point, price is only vaguely distinguishable from value. However, consider that you might be willing to sell 4 ounces of gold for a TV, while I might be willing to sell a TV for half an ounce of gold. These are our values. My value of TV is 1/2 oz Au. My value of one oz of Au is 2 TVs. Your value of TV is 4 oz of Au, your value of one oz of Au is 1/4 of one TV.
If we shake hands at 1TV=2ozAu, that that's the settled price. In this case, both, you and I, come ahead in terms of our values, because both got more than we were ultimately ready for.
Value is a subjective measure of utility. Price is an objective measure, because it always involves more than one individual, and their agreement, which is what makes it cross the borderline of objective reality.
So, now when you say that gold has no price, it makes no sense. I think your definition of price is a measurement in official currency.
I, on the other hand, do not need anything official. Even the dollar. I believe it was a crime to establish the name for a weight of gold. Because it already has a name, and it is it's weight and purity. The name of a unit of my money, therefore, is say, one ounce of 99% pure gold. Where is my need for a dollar? Can't I demand certain number of these units for my labor?
Now, the name, dollar, was established with a very long view in mind. It was established in order to get the people used to it. So that they are custom in settling their transactions in dollars. Once they were, then it was time to slowly change the official definition of the dollar behind the scenes. Before they knew it, the dollar meant one piece of paper exchangeable for another piece of paper and nothing more.
From piece of meat to a click, from a click to a word, and before the dog knew it, he was doing something for mere words. This is a very old trick.
Imagine doing the same with "one ounce of 99% gold". Today, we would have the note that says "one ounce of 99% gold", while in fact, it just dirty paper. Can such really be pulled off? Someone said never to underestimate the gullibility of the crowds.
Are you not aware of transactions where drugs or arms perform as money, not as barter? Drugs, especially, because they are divisible and more universally accepted. No? Say, party A exchanges something for drugs with party B, in order to exchange them for something else with party C. In this case, this is not barter. Why? Because at the point of transaction of A-B, the party A has no knowledge of the party B. This means it accepts drugs as something that will perform the function of money.
Government has no business in controlling money, because it has only one desire - spend, basically the same reason you don't trust your money management to a shopaholic.
What it should be doing is taking care of standard of weights and measures. Thus, making sure that no one trades underweight units, say half-an-ounce rounds while calling them "an ounce", or 14 carat gold while calling it 24.
The rate of exchange of silver and gold. You gave a good description of where it came from. So? Wherever it did came from has no importance. If the market wants to trade 1=1 today, and you are setting the rate through violence to 1=15, then you are creating that opportunity for speculation (ok, arbitrage). This arbitrage is going to have a cost, and you are the one imposing it.
If you so insist that the rate historically and for good reason was 1=15, then it very likely will be that or close to that, without any interference from the bloody government. But once you set it officially, then I can guarantee you that it won't be that for much longer.
Which do you really want?
-The fact that the rate was officially set, (hooray!)?
-Or that there be a rate?
You can not have both!
Why are the people buying gold right now? Because the official rate is set! It is 1700+-200. And because it is set, it is wrong! The only thing I have to do is to figure out which way is it wrong. It should be about 50000! From here I simply buy the undervalued good. The government violence in keeping the set rate will make sure that I make a profit! Why? Because the imbalances are only accumulating. One more straw, or may-be million more straws, but there will be that last straw that will break the camel's back. At that point, either the system will crash and overvalued money will collapse, or the government will capitulate and change the set rate to what it should be! It's either they lose or I win.
Exactly the same applies to silver and gold. Once the rate is officially set, it is only a matter of time before one or another of a pair is collapsed. If the government sets the rate weekly, then it capitulates weekly, and I start over again.
But for as long as the frequency of rate set is lower than that of free market, I am given a free ride, because it is a trivial matter of comparing the market rate to a set rate. To eliminate my advantage, the government has to set the rate as frequently as the free market, and to the extent that such is practically achievable, then the government is simply mirrors the change of a market rate, meaning that it sets NOTHING.
You make more comments which I simply do not comprehend. Such as your assertion that I somehow agitate for a managed currency. It should been clear from the above that "management" is the last thing I would ever want.
Market is great thing, and it got there without any help from the government, contrary to any propaganda that the government may wants to spread.
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Posted by Bischoff on 11/13/12 10:25 PM
@ DB
DB: "Anytime you set an official rate between two freely moving prices, you create a condition for imbalance. This then has to be smoothed by speculation, which, while it does remove the imbalance, does it at the cost of speculator's profit."
From your lips to Bischoff's ears.
BISCHOFF: I am all ears. As to your comment, you cannot have prices unless you have a standard. Just as you cannot talk about a linear distance unless you give the measurement in terms of feet or meters. To measure value, the standard is gold. To measure the value of silver, or any other good and commodity, gold serves as the standard to arrive at a "price". Since gold is the standard, gold has no price.
What you call speculation is mere arbitrage. However, when you arrive at a "price", it is expressed in aliquot parts of gold. To do otherwise makes no sense, unless you use the central bank fiat currency as a standard. Is that what you are doing... ??? Please, enlighten me how a "managed" currency is any different than using a rubber band to measure linear distance.
Reply from The Daily Bell
Always with the pronouncements. People are not robots. Some will use gold as a standard measure, but some will measure gold against silver. AmerIndians would have used sea shells as a primary value. Be an oracle ... but understand that others may not agree.
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Posted by Bischoff on 11/13/12 09:59 PM
@ mava
MAVA: "And, regarding gold vs. silver, that the finds of silver had destroyed the ratio is logical, but I don't think there should have been such ratio to begin with."
BISCHOFF: Regarding the gold to silver ratio, it was gold that emerged as "money" to be firmly established as such in Mesopotamia about 3,000 years ago. When prospectors searched for gold, invariably they found silver as a by-product at an approximate ratio of 1 oz. of gold to 15 oz. of silver. IAW, the same amount of "work" which produced 1 oz. of gold also produced 15 oz. of silver.
Since many of the physical and chemical characteristics of silver are the same as those of gold, and the value ratio between the two metals was relatively constant, silver was an adequate substitute to serve as money with the added benefit of being more divisible than gold.
With the large gold finds in South America, Spain also hauled off large amounts of silver. The Spanish "Pillar" Dollar was one of half a dozen foreign coins which enjoyed the largest circulation in colonial North America.
When the Congress passed the first Coinage Act in 1792, it set the value of a U.S. Dollar equal the the value of a Spanish "Pillar" Dollar, meaning the same weight and fineness of silver. However, the Congress also defined the U.S. Dollar as the market price of gold in terms of silver which at the time was 15.5 oz. of silver for 1 oz. of gold. The Congress fixed this ratio into law with the Coinage Act of 1792.
This in my opinion was a mistake. Subsequent Coinage Acts in their provisions demonstrated an ongoing battle between silver and gold for preference as "money".
Silver, due to its greater divisability, enjoyed a preference among the merchant class and the working class. As during the middle of the 19th Century communication became more sophisticated, arbitrage between markets became more efficient. At that point, silver and gold locked in battle to become the commodity to serve as "money". Despite political battles raging for decades, with the "Gold Act of 1900, the battle was won by gold. The official "gold standard" in the U.S. lasted for a total of 33 years. It was followed by the international bullion standard in 1935.
Section 10, Article I of the U.S. Constitution acknowledges that both gold and silver can serve as "money" and it prevents the states from making anything but gold and silver legal tender in payment of debt.
In Section 8, Article I of the U.S. Constitution, the government only serves to set and control the weights and measures, in this case of U.S. Coin.
Other than these two provisions, there is no government involvement. Our current fiat monetary system became only possible through subversion of the U.S. Constitution. I consider the 16th and 17th Amendments as subversive to that end.
MAVA: "Is there an official ratio between firearms and drugs? No! Yet, those two items are firmly in the top levels of money substitutes."
BISCHOFF: Please explain to me how fire arms and drugs are money substitutes... ??? Just because they can serve as commodities in barter transactions, I cannot see how they are "money" or "money substitutes". Please explain it to me. Can you... ???
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Posted by mava on 11/13/12 08:42 PM
LOL, you had me freaking out for a second. I thought I had missed the whole point of my comment (to comment). Only later, I had realized that since my point is present in your comment, then it must had been, indeed, posted.
You must have cut it out on accident, while commenting.
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Posted by mava on 11/13/12 02:47 PM
Right, I should have been more clear on this. The market rate is an obvious fact, and there is nothing wrong with it. The official rate that the government sets up, is all wrong.
The government sets it up, because it wants to disable the natural self-leveling mechanism of money, in order to create imbalances, so that then it has a reason to declare that the money had failed, and we need either money substitutes or regulations or both.
This profit, while completely legitimate, must be recognized as an effect of official restraining rate.
In other words, if I break my window, then call a handyman, he will fix it, and his profit is legitimate, but this doesn't mean that it is a good idea for me to break that window to begin with.
Government should have no control over money.
Reply from The Daily Bell
"Anytime you set an official rate between two freely moving prices, you create a condition for imbalance. This then has to be smoothed by speculation, which, while it does remove the imbalance, does it at the cost of speculator's profit."
From your lips to Bischoff's ears.
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Posted by mava on 11/13/12 08:38 AM
Just because you have explained (your point of view) on some subject, doesn't mean you have convinced anyone.
And, regarding gold vs. silver, that the finds of silver had destroyed the ratio is logical, but I don't think there should have been such ratio to begin with. Is there an official ratio between firearms and drugs? No! Yet, those two items are firmly in the top levels of money substitutes.
Having a set rate stinks government, big time, and it is the government that kills everything.
Reply from The Daily Bell
The silver-gold ratio is market taken from historical records. Government rate-setting is supposed to be a recognition of the historical record ... It wasn't ...
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Posted by Bischoff on 11/12/12 06:34 PM
@ DB
DB: "Silver has been a money metal for perhaps 10,000 years or more. It has been an industrial metal for perhaps a few hundred years. The idea that one cancels out the other is ludicrous."
BISCHOFF: You go on beating the same dead horse. I simply cannot understand why you fail to see that money is the standard of value. You can have gold be money, or you can have silver be money. You can also have silver and gold be money at the same time as long as there exists a constant ratio of value between the two metals, which BTW existed for most of history.
However, once the ratio fell apart, as it did with large silver finds at the end of the 19th Century, such as the Comstock Lode, the battle over which metal should serve as the standard of value commenced. We know that gold won that battle.
I think I explained this over and over again, yet you offer the same old response again and again. Why... ???
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Posted by mava on 11/12/12 02:47 PM
BM:
You are right in that my comment was not entirely in context of either the interview or your comment. On the other hand, nothing is... entirely... in context. But, I must concede, that talking strictly, I agree there not even an indication of the government shrinking any debts.
Anyway, I was just making a point that if we are thinking of unfunded liabilities specifically, not just some "debt", then those liabilities depend on the number of future recipients. You agree? If there is one senior left tomorrow, then suddenly, there is no problem, right?
It is my view that the long term goal of Obamacare is to reduce number of those recipients. I'll leave it to your imagination as to exactly how.
You then were making a point that according to Gary North, it is a mathematical impossibility to even keep up with those liabilities.
My addition was that Gary North assumes that the government will actually pay them. He does. I showed, that the government can simply print the notes, and then you and I will pay those liabilities through inflation. Not through an interest on investment.
You, not unlike Gary North, seem to trust the government statistic. You say, that printing 11 trln in a 16 trln economy would be quite noticeable.
I could not agree more. It would. If, the economy is truly only 16 trln big. But, this would be trusting the statistic. Let's think about it. If economy is only as big as the government says it is, that would mean that the government had never just printed some money into it (as I suggest they will). Right? I mean the black book can never match the legit book. So, here, we already on the thin ice, because no government can refuse to do that.
But, here is another one. Have you thought about all the money recently printed that we sort of know about? Have you noticed that all that money produced no impact of the scale that was anticipated? Can you explain this?
My explanation is simple. I absolutely take for granted that the government lies to me and that the real theft if about ten time of what I may guess anytime. Therefore, I know that the economy is probably 160 trln big. I assume that the black book has a lot more money than the legit book. The black book is the real one. This is why, the recent batches of money printing did not make an expected dent. Because that money is paltry as compared to the black book. This is my answer to the mysterious absence of inflation.
So, printing 11 trln a year around the whole FED process is no big deal. Over time, you right, it would create noticeable inflation. As it should, as the whole point of it is to make all of us pay those liabilities, including the seniors themselves.
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Posted by boatman on 11/12/12 07:13 AM
i notice he does not suggest what the home buiders can do to 'find something else to do'... .thats because there isn't ANYTHING.
last remaining large US manufacturing sector is toast.
bonds are correctly the 'big short' of the next 18 years, but this money goes into gold, not equities or farmland[too illiquid]
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Posted by rossbcan on 11/12/12 06:05 AM
NS: "As they direct income to debt reduction rather than increase debt to buy stuff, the basic growth of the global economy is worsened."
An ancient truism which political and educational suppression failed to quash. Now, formally proven:
Click to view link
NS: "use government spending to buy votes. However, those being taxed to support those who do not want to work are starting to revolt."
again, proven by above. Bite the hand that feeds you? A fatal choice.
NS: "Look at what 1.3 billion consumers are doing."
Yes, look. They are the unseen hand, making choices that integrate to unstoppable forces. It is elites whom are "dust in the wind", not those able to CHOOSE:
Click to view link
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Posted by Bischoff on 11/11/12 11:36 PM
SCHMIDT: "For the first time in modern history gold is now part of mainstream investing. Gold is in most asset allocation models today. All of that means that the amount of gold to be owned by real investors, not traders, will rise over time. So gold is not finished. However, those looking for a price explosion to ridiculous levels immediately are going to be disappointed. I have no interest in silver at today's prices. Sell it."
BISCHOFF: I agree with Ned Schmidt, except to say that after 1971 for prudent investors gold has been part of any portfolio to insure its value against inflation. Gold is money, though it has been banned from the worldwide "managed currency system" since 1971.
As to silver, Ned Schmidt rightly looks at silver as an industrial commodity, not as money.
Reply from The Daily Bell
"As to silver, Ned Schmidt rightly looks at silver as an industrial commodity, not as money."
Silver has been a money metal for perhaps 10,000 years or more. It has been an industrial metal for perhaps a few hundred years. The idea that one cancels out the other is ludicrous.
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Posted by Danny B on 11/11/12 11:35 PM
Hmmm, I don't know about any water meme but, I do know a bit about water. While global warming is a joke, climate change isn't. A couple of links,,, natch.
Click to view link
Click to view link
The ice pack is shrinking in the Eastern Himalayas and growing in the Western Himalayas. The Himalayas are the source of the 10 largest rivers in Asia. These ice pack changes will cause huge problems, especially in the valleys of the Indus and Ganges.
Click to view link
I traveled by road across India and I can assure you that the rivers are very polluted.
China has a different problem. It has 20% of the world's population and only 6% of the world's water. China is also high up on the list of countries over-pumping their groundwater.
Click to view link
Along with water problems, there are severe soil problems.
"A recent study by the Royal Commission on Environmental Pollution concluded that approximately 30 per cent of the world's arable crop land has been abandoned because of severe soil erosion in the last 40 years."
Then, there are the problems with fish.
"lead author Boris Worm of Dalhousie University in Halifax, Canada. "If the long-term trend continues, all fish and seafood species are projected to collapse within my lifetime."
Click to view link§ion=34&topic=44
Reportedly, the U.S. is facing shortages too.
"The US, which has experienced record heatwaves and droughts in 2012, now holds in reserve a historically low 6.5% of the maize that it expects to consume in the next year, says the UN."
Click to view link
Currently, America uses about 72% of water consumption to raise meat. It's not that the U.S. is particularly short on water. It's just that it's in the wrong places. Many of the areas with the longest growing season have the least water. Then, there is the falling water table in some of the most productive states. During 2000, 23.5 cubic kilometers of water was withdrawn from the Oglalla aquifer.
Click to view link
Many of these problems could be remedied if there was such a thing as free water pumping and free filtration. I expect these problems to be leveraged up to cause a big famine.
Have a nice day :)
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Posted by reggie on 11/11/12 11:10 PM
Some good ideas on how to play the collapse, especially regarding the renminbi.
One quibble however. Markets are 100 percent efficiently priced all the time. I mean this is what markets do, they discover the price of something from the basis. HF trading, manipulation, no matter. What they are zero percent efficient at is discovering VALUE. Value is subjective, and it's where the money is made - by speculatively buying something that's undervalued at the current price.
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Posted by Revolutionary thinking. on 11/11/12 09:18 PM
Brilliant guy, I agree, except about silver.
The DB questions and interviewees are the most diversified and interesting on the net.
Thanks.
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Posted by db7778 on 11/11/12 06:07 PM
PLEASE do us all a favor... and find some folks that KNOW about the WATER "meme", and the best ways for retail investors to "play it". Not looking for the next "guru"... .just some folks who can show us the way.
What's the best way, if any, to invest in the Chinese Renminbi ?
Finally, Ned mentions folks are going to need to find other ways of making a living not connected to housing. For a lot of folks, living in tents, or basements of their parents, etc., that appears to be a alot more difficult then Ned thinks.
Having had 6 million (+) manufacturing jobs sucked out of USA in past 30 yrs has helped a great deal to destroy the middle class. Other then helping folks sign up for welfare and food stamps, our leaders don't seem to have any plans of correcting their "mistakes", if in fact they were mistakes and not intentional. I'll leave it there. You guys know the story better then I ever will.
Reply from The Daily Bell
PLEASE do us all a favor... and find some folks that KNOW about the WATER "meme"...
We'll keep at it.
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