Wednesday , April 14 2021
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RIP Gold. Killed by Bitcoin

Summary:
Yves here. I am loath to give either Bitcoin or the current widespread investor belief that big time inflation is upon us any attention. However, the things I really want to talk about take a bit of work, and I’m buried by administrativa that is getting in the way of girding my loins to do some serious writing. So this piece verges on fluff, save for the absence of animal pictures. However, one good reason is the specter of Peter Schiff getting a comeuppance. I had the misfortune to meet him in person when I was doing an SBS Australia show via remote camera in NYC. Schiff was also on and we were next to each other, staring into the camera. Not only was Schiff astonishingly rude to me (as in even before the show got underway, this wasn’t the result of on-air sparring), he was appalling in

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Yves here. I am loath to give either Bitcoin or the current widespread investor belief that big time inflation is upon us any attention. However, the things I really want to talk about take a bit of work, and I’m buried by administrativa that is getting in the way of girding my loins to do some serious writing. So this piece verges on fluff, save for the absence of animal pictures.

However, one good reason is the specter of Peter Schiff getting a comeuppance. I had the misfortune to meet him in person when I was doing an SBS Australia show via remote camera in NYC. Schiff was also on and we were next to each other, staring into the camera. Not only was Schiff astonishingly rude to me (as in even before the show got underway, this wasn’t the result of on-air sparring), he was appalling in his behavior towards the SBS host and another guest, the #2 in the Australian Treasury. He interrupted both, repeatedly. Had I been the host or a producer, I would have cut the camera to New York and dressed him down. But this was a live show and the host had apparently never contended with a an out of control jerk as a guest.

Normally people in the money management business are exceedingly polite, or at least not rude, because you never know who knows who. That waiter might be an actor with rich parents who belong to an important club, and he could take revenge if you treat him poorly through his parents’ extensive and well-connected contacts.

Schiff ran horrifically undiversified portfolios in the runup to the crisis, betting heavily on foreign currencies and gold (buying junior Australian mining shares!) since he believed the US housing crash would lead to a dollar collapse and hyperinflation. Mind you, narrowness of the portfolios he ran was on the criminal edge of incompetent. He delivered 40-70% losses in 2007 and 2008. So despite getting the key element of the big picture right, he got everything else wrong.

So how does his spectacular rudeness fit in? Have you heard the theory of Nigerian scam letters, and their many follow on variations? (I’ve gotten missives from Janet Yellen, Steve Mnuchin, Jaime Dimon, and Ben Bernanke. I was particularly impressed by the one from Mario Draghi). As Business Insider explained back in 2014:

According to new book “Think Like A Freak,” a follow-up to the popular “Freakonomics” by Steven D. Levitt and Stephen J. Dubner, the scam’s obviousness is its chief selling point….

Levitt and Dubner explain the genius behind such an obvious scam in terms of “false positives,” referring to email recipients who engage with the scammers but don’t ultimately pay. Reaching out to scores of potential victims isn’t much work, thanks to the ease of email, but with each reply from a gullible target, the scammers are required to put forth a little more effort.

Therefore, it’s in the scammers’ best interest to minimize the number of false positives who cost them effort but never send them cash. By sending an initial email that’s obvious in its shortcomings, the scammers are isolating the most gullible targets. If you trash their email, that’s fine. They don’t want you, someone from whom there’s virtually no chance of receiving any money. They want people who, faced with a ridiculous email, still don’t recognize its illegitimacy.

Schiff appears to be a similar sorting mechanism. His seemingly pointless nastiness would deter potential clients who’d want to do real due diligence on his track record and portfolio construction, since anyone who did that would run the other way. Instead, he’s filtering for naifs who are taken with his libertarian doomsterism and don’t know enough about finance to even think through how to vet him.

Note that the author, David Llewellyn-Smith, was a gold trader in one of his former incarnations, so this is a topic of personal interest (I suspect Schiff as well as gold). However, I don’t put Schiff versus Mark Cuban in Godzilla versus Mothra terrain. More like Punch and Judy.

By David Llewellyn-Smith, Chief Strategist at the MB Fund and MB Super and the founding publisher and editor of MacroBusiness. Previously, he the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. Originally published at MacroBusiness

Some interesting tweets from various financial mavericks overnight on the ongoing gold versus Bitcoin debate. Pater Schiff versus Mark Cuban:

Some muddy thinking there. If BTC turns you into a banker, then it obviously competes (that is, threatens) other bankers. This is the conundrum that confronts all private currencies. The more they succeed the closer they get to failure as the threat to existing issuers of currency grows. This includes every nation-state.

So, to the extent that BTC is a medium of exchange, it is therefore doomed, and that argument can’t be used to justify its role as a store of value like gold.

Can the store of value argument hold up for BTC without it being a medium of exchange? It has for gold for thousands of years so quite possibly. Gold is money but it’s not readily usable currency. BTC could be considered in the same light.

The artificiality of BTC’s value is a problem. It can be argued using cultural relativism that gold is no more intrinsically valuable than BTC. But it does have a long history, especially as a reserve currency, that must be worth something. Can we see central banks buying BTC? Certainly not if it develops as a parallel medium of currency that undermines them.

Likewise, gold is the outcome of production. BTC consumes resources to produce nothing. Not that that is necessarily a problem in a virtual world but it again weighs against the perception of BTC as a store of value. So does the fact that BTC is a truly useless item if some kind catastrophe befalls society which does underping the value of gold in some measure.

As well, if BTC is a store of value then in relation to what? If it is “digital gold” then it should respond to the same price inputs. Real interest rates and the value and stability of the prevailing reserve currency should determine its value. So far, that has kind of been the case but if it keeps going up now as real rates rise and the USD turns higher, which is why gold is falling, then BTC starts to look a lot more a free-floating ponzi-scheme.

One thing I can agree on with Mark Cuban is that, for the time being, the lure of BTC has proven strong enough that it has killed gold as the reflation metal.

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