The Age of Gold
Interview with Robert Blumen
by Jay Taylor
Hard Times into Good Times
by Robert Blumen: Mad
Men: The Show About Business
Welcome back to "Turning
Hard Times into Good Times," I am your host Jay Taylor,
and I’m really pleased to have with me my friend Robert Blumen.
Robert is a software developer who writes and blogs frequently for
the Ludwig von Mises Institute, their website. His articles have
appeared in LewRockwell.com,
Economic Affairs, Marc Faber's Gloom Doom & Boom
Report. We’ve had Marc of course on this show on a couple of
times in the past. He also writes for the Agora Publications’ daily
Good to have
you with us and I did mention to the folks your background, a little
bit about your background. So welcome to "Turning Hard Times
into Good Times."
Thank you, Jay!
Well really a pleasure to have you here from San Francisco. You
are a lucky guy I think living in San Francisco. I wished, I would
trade San Francisco for New York, I think, and probably at least
the climate, that's for sure.
I think we are in a – to see which is going to go broke fastest.
Yeah, I think you guys will beat us on that score, but not by much.
We had some people on this show not that long ago, who actually
talked about San Francisco and the finances in San Francisco. So
we do know something about it, but the whole idea is that you can
– I guess that you can have wealth and you can – you don't really
have to work for, you can just sort of imagine it and create it
out of thin air.
talk about gold-mining today, Robert. This is what we wanted to
talk to you about. This show as you know is so much about gold mining,
about gold, about protecting wealth. And we are constantly hearing
on this notion, I mean, because people really look at gold like
as any other commodity. They think that higher prices of gold are
going to increase gold-mining, that's happening.
– I see a boom in the junior mining sector, see companies going
out, spending money, putting holes in the ground and discovering
deposits. We are seeing it rising, gold-mining profits are occurring
now. Certainly, this is what I call a buying opportunity of a lifetime,
the bull market of a lifetime for gold-mining stocks.
you would think that with rising supply you would have a declining
price, but you wrote an article called Mining Doesn't Matter,
in which you claimed that gold-mining has little impact if any on
the gold price. Well, what motivated you to write that article?
Well Jay, as you are just saying, anywhere you look around in the
media people are aware that mine output is increasing. I read tons
of these reports from analysts, people at banks, things in the media
about gold. I would say 90% of the time if there is a 50-page report
about gold that 40 pages of it is going to be about gold-mining
and then they give their forecast.
all these analysts who hear Jon Nadler, Jeff Christian, anyone who
writes about this, does quantitative studies of mine supply and
they base that on their forecast.
reason for writing about this is I know that this is the wrong way
to look at it and I wanted to help people understand how it really
Well why is it the wrong way for looking at it? I mean it certainly
seems to be logical. If you have rising supplies, normally all other
things being equal you would expect the price to decline. Wouldn't
that hold true for gold as well?
Certainly, that is true, but there are two ways of looking, or there
are two different kinds of markets, there is commodities and there
are assets. I'm going to define these in an idealized way, nothing
really is perfect. But for the purpose of discussion, a commodity
is something where there are no accumulated stockpiles of it.
So in the
case of a commodity whatever gets produced also gets sold, it gets
purchased and it gets consumed. And by consumed I mean it's destroyed.
It's transformed into a form where it is taken off the market permanently.
of that would be gasoline or any agriculture, something you eat.
You buy it and you destroy it. So for a commodity the supply and
the demand have to be very tightly balanced and if one of them changes
the other one has to change. And the way that is accomplished in
a market economy is through price. If you would have more supply
the price has to go down.
type of market is what I am going to call an Asset Market. And let's
say for the moment an asset market in an idealized way is the market
in which there is a certain stockpile of the asset, which doesn't
change. And in asset market, you can't really look at quantity supplied
and quantity demanded, because the quantity is the same. In asset
market, the quantity of the existing stockpiles is traded around
among different people. So gold is an asset.
Now the gold
supply does grow a little bit each year, it's between 1% or 2%,
but the market is dominated by trade among the existing stockpiles
of gold, and that's how the price is formed.
All right, so we've had – so basically what you're saying is that
the gold is the mine going back, maybe thousands of years is still
in a stockpile somewhere –
– or around world.
There’s about five billion ounces of gold above ground according
to some estimate.
mine supply is somewhere in a 1-2% of that amount each year.
So gold is not an annual market then, it's more like a financial
asset as you are saying, were existing holdings the trade essentially.
So what's driving the gold price. We're seeing a rise in the gold
price from $250 back in 2002 to over $1400?
You could ask the same question if you're looking at any other financial
asset like suppose there was a company you follow, Jay that had
a 100 million shares outstanding and that a company for whatever
reason did not see the need to issue anymore shares, and yet you
see the price going up. Then I don't think anyone who is looking
at that would say that the prices moving primarily because of anything
to do with the quantity of shares, that people are revaluing the
is happening with gold is people are revaluing mostly the existing
gold in terms of Fiat money that they are placing a higher valuation
on it, and we don't know necessarily why that is exactly but it's
got to have something to do with the quantity of Fiat money increasing
or people anticipating that there will be further increases in the
quantity of money. And that quantity of money I can make a pretty
confident prediction that quantity of money is going to grow faster
than the quantity of gold over coming years.
Well, that would seem to be a somewhat safe bet right now, Robert,
I think that given – the mindset of Mr. Bernanke and others, I don't
think you'd find too many people who would be willing to take you
up on that bet.
seeing a rise, a dramatic rise in the price of gold. It is definitely
a spring gold-mining production, those of us who follow this industry
closely know that it is a very difficult thing to put a gold mine
into production, it's not, I mean it takes years and years to do
saying even if there was a sudden surge in the gold supply it wouldn't
necessarily have much to do with the gold price if the quantity
of money was increasing at an equal or greater pace perhaps.
I'd say that, yes. Part of if you – I was just reading an article
in the Canadian Globe and Mail the othe I'd say that, yes. Part
of if you – I was just reading an article in the Canadian Globe
and Mail the Globe and Mail the other day, and I have probably
seen a hundred articles like this. If you look at the annual figures
somebody was writing about how the gold supply annually had increased
from 1500 tons per year to 3000 tons per year, and that looks like
wow the supply of gold has doubled.
it on an annual basis but if you look at the total amount of gold
out there, it's not really that impressive. It may be is up 10%
or 20% over that period of time, which is probably the amount of
money supply grows in a year. So definitely, money supply is far
outpacing than growth in gold supply.
Of course, the last great bull market in gold ended in 1980, when
Mr. Volcker slammed on the brakes, well, I don't know if that's
the right terminology or not. Let's say he reduced the growth and
the money supply very dramatically, and we did see gold fall from
850 to I don't know 300, ultimately to 250 or so. I guess you don't
think that prospect is very great, that's not likely to happen again
anytime soon in your view.
I don't think there is a political will to do that. Volcker was
willing to take a lot of heat and Reagan was in his corner. Reagan
understood what he was doing and said, look people hang in there,
things are going to get better once we get this inflation under
control. I see no real understanding of that among the political
class in this country anymore and no political will to endure pain
for any length of time in order to fix the problem.
Well would you suggest that the pain might be greater this time
around than it was in 1980 or the problems much bigger than they
were in 80s, so that even if that solution were proposed or if it
were, it implemented that it would resolve and considerably more
pain than we had in the 1980-1982 time-frame?
And I remember,
I was fairly a young man then, and I remember it was a very severe
recession, it was at that point in time the deepest recession that
we had since the Great Depression, but do you think it would be
much worse if they tried to impose a policy like that now?
I'm sure, Jay, you and your listeners have seen these charts of
Debt-to-GDP ratios and debt compared to other things. All those
charts have been in a pretty steep uptrend. There is a lot more
leverage in the system now than there was back then. They figured
out kinds of creative ways to make things more highly leveraged,
so there is a lot further to fall on the downside.
So going back to this – it's sort of the general consensus or the
approach that analysts take these days. Essentially the analysts
of the gold price, you're saying basically they are really focused
on supply, do they look at the demand side at all?
Do they look
at the notion that because money supply is growing very dramatically
that we are going to have the surge in demand for gold as they store
The majority of analysts do not look at demand in that way. What
they look at is they will give a number for demand. They’ll say
this year demand was, for jewelry was this many ounces and investor
demand was this many ounces. The reason they do that is because
they are trying to compare it to this supply number, which they
got from mine supply and maybe they throw in scrap. But in my view,
that number, they come up with for demand is a meaningless number
and let me explain that.
we were talking about shares of a stock, you had some stock, you
told me to go analyze it for you, I come back to Jay, the demand
for this stock last year was 10 million shares and the demand for
this stock next year will be 20 million shares. What would that
mean? When we are talking about something – you could look at the
Let's say that
I went and looked up on my favorite financial website, there were
10 million shares traded. That tells you nothing about the price
because as you know, a stock could go up on increasing volume or
it could go down on increasing volume or it could go side-ways on
decreasing volume, the trading volume tells you nothing about the
direction of the price.
can't say that if there were 2500 tons mined that there is going
to be a buyer for everyone of those tons or ounces so the volume
of gold in the market during any given year will be greater than
the amount supplied. But that still really tells you nothing about
where the price is going because the real question is, what value
will those ounces be traded at? And that depends on the evaluation
that the existing market places on the gold versus the dollars.
It doesn’t depend on any kind of number. You can't analyze gold
quantitatively the way you would analyze a commodity where there
is no stock pile.
So it really boils down to a confidence or not in the dollar, and
if there is a loss of confidence of dollar, we are certainly seeing
this happen, people are trading in their paper money internationally
as well as people that sort of understand what you are talking about.
To an extent, people understand that their paper money is losing
value. They understand that Mr. Bernanke does these QE maneuvers
that he is basically debasing the currency.
it's amazing to me when you think about the Chinese, maybe a mass
something like, what, 2 or 2.5, or 2.7 whatever the number is trillion
dollars by working hard, sending us products and accumulating foreign
reserves and Mr. Bernanke came with a few keystrokes to basically
create two trillion dollars out of nothing, and sort of without
doing anything, it's just amazing, and I guess some people are starting
to get it.
So to what
extent though and to what extent do you think that some of the analysts
might finally catch onto this, I mean I think you can go to place
like Sprott in Canada, Eric Sprott and his analysts certainly understand
this, but John Nadler has been calling for lower gold prices every
year over the last ten years and we’ve had nothing but higher gold
prices every year.
I mean you
have to wonder why he doesn’t change his thinking, but anyway, you
wrote an article, The Myth of the Gold Supply Deficit, what was
That was about, this is a related error in looking at the gold price.
It's based on the idea that there is a supply deficit. This idea
of the supply deficit prominently promoted by GATA, it's an organization.
I know you had on your show and I think they do a lot of great work,
but in this particular case, they are wrong. So I will explain why.
had a commodity like oil and a given country had a 30-day stockpile
of oil. Let's say they doubled their consumption. So each day they
are drawing down their stockpile by one day's worth. We can be sure
that in 30 days that process has to end. That is a reasonable definition
of deficit because you are exhausting a stockpile, and when that
stockpile is down to zero, either they have to produce more or consume
less, which is going to require a higher price.
But in the
case of an asset, let's say the environmentalists win. No more gold
mining, we just have to make due with the gold we have. So you notice
that during a given year, there was ten million tons traded.
it make sense to call that a deficit? I would say, no, because the
gold is not destroyed. It's simply shifted around among different
ownership, and there is no limit to how much volume of shifting
around can occur. You never run out because you are not destroying
it, you are moving it around.
idea that there is a supply deficit because more gold is traded
than is produced, that is an incorrect way of thinking about the
All right. We have had Bob Hoye on this show, and I don’t know you're
somewhat familiar with Bob Hoye's work. Bob has talked about these
great credit contractions that occur and he's noted that the real
price of gold, that is the price of gold in terms of what you can
trade gold for other commodities and other items, goes up during
these major credit contractions. Bob Hoye points out that during
these times it does serve to increase the gold mining profits, gold
mining activity, gold mining production, and that it actually tends
to then re-liquefy the banking system with honest money. But I have
an idea that you wouldn't necessarily buy that argument?
There is something really important about what you just said, I
wrote an article about how the gold – mining does not really influence
the gold price, but in the other direction certainly the gold price
will influence the gold-mining, because the higher the price of
gold, the more sub-marginal deposits become economically mineable.
So it totally
makes sense what you're seeing in the market and what Bob Hoye describes
that as the price of gold goes up you would see a boom in gold production
and maybe the supply grows by 2% a year rather than 1% a year.
Okay, well we're getting this gold supply increase, that is true,
and as you say it's not very big relative to the total amount of
stockpile of gold, but do you think there will be a problem with
the markets absorbing this new supply? I mean, it doesn't seem like
there would be given the kind of quantitative easing that's going
on, but –
One of the things you see in all these articles that people are
saying that gold supply is 1500 tons and half of that was jewelry
and half of that was investor and now it goes to 3000 tons where
is all the new demand going to come from?
So I went
and looked up some figures for the LBMA, which is Bullion Investor
Bar Market in London, it's one of several bar markets in the world.
Just based on LBMA volume, they absorb an entire year's mine supply
in about 12 trading days.
Now there are other bar markets in other nations and there are coin
markets. So the volume of these markets is so great that entire
year's mine supply can be absorbed in just a few days. So now, I
see no problem in the market absorbing the supply.
Robert, I can sympathize totally with you because I am battling
a cold and it's really a difficult task. We've got a couple of minutes
left, so I hope we can hang in there with this. If it's not mining,
so how is the gold price set then? I mean we could just be little
bit more clear about that, then if it's not the supply and the gold
is coming from the mines, so what is really setting the gold price?
It's the valuation that people who hold gold, at what valuation
are they willing to sell, and the people who hold dollars at what
valuation are they willing to bid. And the market brings that all
into a balance where you have a price in the same way that it does
for stocks or land or any other asset.
Okay, so how can we forecast the price then? Now we're looking at
increases in money supply, is that what we've to look at, not only
the US dollar but currencies around the world?
Yeah, it's bit of a tough asset to forecast because unlike stocks
it doesn't have a net asset value, and it doesn't have a dividend,
it's something that people value in order to hold it and it's a
little bit hard to get your head around that quantitatively.
got to have something to do with money supply growth, but I think
anyone who has a quantitative model, they're giving you a very precise
forecast that's probably baloney.
And baloney why because you can't predict human behavior or what?
We can't – in the case of – let's say a stock that you analyze and
it's – you can get your head around the net asset value because
you're looking at what their assets would trade at in an external
market, and you can make the argument that a stock should eventually
trade at its net asset value. But gold, you can't really decompose
it any further. It just comes down to the valuation that people
place on it, and you can't have a quantitative model that will tell
you that to any real precise degree.
Well, we're just about out of time here, Robert, we have 30 seconds
left, but let me just ask you all that said, are you bullish or
bearish on gold at this point in time?
I can't quantify it, but I give you my very confident forecast that
money supply growth will be faster than gold supply growth and I'm
expecting that whatever imprecision there is in that model that
I can get the direction right, which is up.
All right. Well, thank you so much for that. It certainly does seem
to be almost as sure as day following night these days, the way
that the mindset is in terms of the Keynesian Economic Models upon
which all our policymakers are operating.
you very much, Robert Blumen, for being with us, we hope to have
you on again for some of your Austrian Economic insights.
Blumen [send him mail]
is an independent software developer based in San Francisco.
© 2011 Jay Taylor