Most Recent Stories

The Great Gold Debate

I went back on Boom/Bust today to discuss the merits of gold in the economy.  Regulars know my position here:

  • Gold is an unproductive asset that shouldn’t be the center of a portfolio.
  • Gold can serve as a hedging or insurance component of a portfolio.
  • Going back to the gold standard isn’t a wise move because it would lead to imbalances similar to what we’re seeing in Europe today with the fixed exchange rate.
  • Gold is “money”, but it’s generally not a very good form of money because its utility as a medium of exchange is not very high.

This was a fun interview which included some gold heavyweights like Rick Rule, Peter Schiff and Marshall Auerback.  Everyone was very courteous and I thought the overall discussion was very fair and balanced.  Peter and Rick made some smart points (though we also disagreed at points) and I obviously agree with Marshall on a number of things.   Erin Ade and Ed Harrison did a great job moderating the discussion and keeping it on point.

I don’t say much in the first 9 minutes, but I was just lurking in the tall grass (or maybe I was just confused/intimidated by the whole 4 person panel thing going on).  I made a couple of key points after that:

  • The value of the dollar declining in terms of gold or CPI is a useless metric.  You have to compare it relative to real wage rates which have vastly outpaced inflation over the last 100 years (see here for more).
  • It doesn’t make a lot of sense to build a portfolio around an unproductive asset class like gold because its value is based more on the belief that it’s valuable as opposed to some inherent utility (see here for more).
  • The 1800’s were a period of great turmoil.  This commonly cited era included a number of financial panics and depressions.  My favorite line of the debate was at minute 24 when Peter says we should just ignore those depressions….
  • The hyperinflationists have been wrong for 10 years running.  How much longer can these predictions garner attention before we all begin to question the foundation upon which they rest?

Watch the full video below:


  1. connie hawkins

    a gold standard certainly wouldn’t be good for the usa’s perpetual war machine.

    and a portfolio equally divided among stocks, gold, bonds, and cash would have done very well through the various bubbles over the last decade or so, and without the volatility.

  2. gbgasser

    How does Peter Schiff have any followers? “Just ignore those depressions during the 1800s”

    Great job Cullen! I think you made some of the strongest points regarding real wealth increases over last 100 years.

    How he (Schiff) can’t reconcile the 19th century US growth which was as you said was an emerging market, is beyond me. Its like he’s comparing the growth in height from age 5 to 15 while you drank mostly milk to your height change from 16-25 while you drank mostly beer and recommending you go back to milk. He’s really quite a fool to listen to sometimes.

  3. Cullen Roche

    True. But that doesn’t mean gold’s strong performance will necessarily continue to provide positive diversification for portfolios….Also, the main reason such a portfolio provided so much balance was because of the short duration and fixed income instruments. A 25/25/25/25 portfolio like the Permanent Portfolio was mainly a bet on fixed income which has obviously been a tremendous performer for the last 30 years. Gold, on the other hand, generated a 3.5% real return with a standard deviation of 30 over the last 50 years….Not exactly stellar figures.

  4. Cullen Roche

    Thanks. I think people are starting to realize that someone who’s been this wrong for this long must be working with a deficient model of the world….

  5. connie hawkins

    that portfolio allocation has actually done well over the last 40 years, and again with much less volatility. if i were 25 years old again, given the current environment, and wanted to build a nest egg over a 15 to 20 year time frame, its certainly something i’d consider strongly. trading these swings is not for amateurs, or for the faint of heart. during the last two bear markets, volatility has chased many small investors out of the stock market altogether.

  6. disqus_zBM4OWvuk0

    I don’t think a gold standard is a desirable monetary system. However, once you wrecked a fiat-based system (goes hand-in-hand with loss of confidence by its users) you probably have little choice.
    Nobody will care about your ETF-based asset allocation once markets have closed. The pixels on your broker statement mean nothing. Your ‘assets’ have been rehypothecated many times over, and are nowhere to be located. Maybe Corzine knows.

  7. Matt

    Interesting discussion, thanks for posting Cullen. Some things that were said certainly confirm what you have often said here: which is that (political) ideology forms the basis of what people say about how an economy should be run. Both pro-gold panelists were clearly very, very anti-government. Someone like Shiff apparently doesn’t care about recessions (“just ignore them”), he only cares about his own savings in gold (?). Maybe if you are wealthy that makes sense from an individual viewpoint. But from a macro viewpoint it doesn’t make sense to have regular ’30s-like recessions because of, or aggravated by having a gold standard.

    So it seems to be that a central point in this discussion about gold is what the focus is. Pro-gold people only/mainly care about some sort of value attached to that gold. “Anti-gold” economists view it more from a macro perspective. And clearly a gold standard doesn’t do well there. Like you said it’s too limiting. Unless of course you firmly believe everything any government does is by definition bad, like the two gold-guys do on this show.

    An interesting article I read about the Eurozone as a sort of gold standard is here:

  8. tealeaves

    There seems to be a distinction between wage earners and capital preservation with respect to gold and fiat standard. With fiat,
    – Wage earners future income stream is inflation (and “wealth” aka productivity) adjusted with some delay

    – Corporate earnings future income stream (earnings) are inflation adjusted (with some delay)
    – Bonds (and currency) are neither inflation or wealth adjusted

    Under an idealized gold standard, bond and currency holders would also be protected from inflation and standard of living improvements. Provided inflation rates are low in a fiat system this is not a problem. That said, there are TIPS today.

  9. tealeaves

    I think Boom/Bust needs to have the great bond bubble debate as a sequel. I’m not sure what panelist is in the bubble camp here (Bass, Faber, Grant, zerohedge?)

  10. Robert Buttons

    In the last 15 years, there have been only 2 major crashes….so the doomsayers are only right once in 7.5 yrs. But then why is Mark Spitznagel so filthy, filthy rich?

  11. John Daschbach

    When I look at the Gold data it seems to follow the same trend as inflation (though with much larger changes on the upside, like 1975 to 1980) up until 2001. Then the gold price trend and the inflation trend have different signs. But interestingly when you look at gold demand by country what you see is a huge increase in India and China over that period. So maybe it is really a macro phenomena, increasing wealth in India and China and a desire to hold gold, including perhaps historical mistrust of fiat money. That’s not the Schiff view, but it’s something that Cullen might think about. It could be that simple supply and demand driven by India and China contributes to a big part of the current changes in gold prices. If China and India are slowing, and inflation is tame, it doesn’t appear to make good sense to hold gold, and if growth rates there are lower over the next decades than the past couple decades, it would suggest that gold has a small probability of gains and a much larger probability of losses.

  12. pliu412

    It seems that no one in the panel comments on this debate question: do central banks manipulate the gold price?

    Maybe the right question is: Do (or Can) central banks use Gold as a tool to protect the country currency from rapid up or down ? Particularly,
    US dollar has a reserve currency status, and is used for gold purchasing in the international markets.

  13. Jeff Jeffries


    What are your predictions on rate hikes and QE ending at this moment?

    That was an awesome discussion. I wish you guys had more time to talk.

    I do remember you once telling me Cullen that you saw better growth opportunities in emerging markets over the course of our future than in the US. Now would you say that prediction has any correlation to wage growth over the course of the next 20 years?

    I personally think we are in a stagflation situation. Unsustainable entitlement programs, rising taxes and health care costs, immigration, all huge elements bringing down wages IMO. If my prediction is correct and wages will not be rising at historic rates in America, what would that mean for gold and our economy in your opinion?

  14. Robert Buttons

    That’s the key difference. Conventional economics ascribes its failures to ethereal notions of “animal spirits” or “irrationality”.

    It would laughable to imagine Einstein dismissing quantum mechanics as “Newton was right, if we just exclude those pesky irrational wave-particles”, but this type of sophomoric logic is de rigueur in conventional economics.

    Austrians have solved that problem (Individual actors acting in their own perceived self interest can create chaos within a system, taken as a whole) without resorting to metaphysics.

  15. Broll The American

    Seems to me Gold only works as long as the belief is out there that one day currencies will collapse and governments will fail. People like Schiff have to constantly find the next boogie man to perpetuate this myth. Gold is a pyramid scheme… it only works if you can sell it to someone in the future for more than you bought it, thus the constant fear mongering to keep the pool of buyers full.

  16. tealeaves

    I think Schiff needs to move to emerging markets and find clients whose citizens don’t have great access to bond and equity markets. When their governments are investing in infrastructure or if the dollar is weak and they face import commodity inflation then their bank deposits are a poor store value. The wage earners will eventually adjust but those with savings have little recourse.

    That said, many countries have cut back on government domestic investing. And further the US has improved the trade deficit largely by domestic oil production which has in part strengthened the dollar. But interest on bank deposits are keeping more in line with inflation globally with a few exceptions across the world.

  17. Poseidon's Bear

    Well I was right. Having a conversation with Peter is not a constructive activity.

    Love how that guy talks right through people including the moderators.

    At least Rick and Marshall were civil. And they had some useful things to say.

    I still think you should have gotten her phone number…

  18. TimeToPanic

    It’s fair to say that Cullen Roche doesn’t understand the utility of gold.
    If he did, he would understand central banking, the BIS, the Euro, and the cultural attachment to gold in the East.

    He should read some history and some scholarly books to improve his knowledge in this area.

  19. Cullen Roche

    What is this comment? Are there any facts? Anything of substance? Or is this just ideological rambling? Where is your evidence that I don’t understand central banks or gold? Where are the facts in your comment? Why bother leaving such a wasteful and useless comment? Please show me the history where your argument holds water. Or better yet, explain why your heroes like Peter Schiff have been so miserably wrong about so much for so long….

  20. Tom Brown

    “lurking in the tall grass” made me think of this strange image again:


    I anonymously posted the above on a colleague’s door this weekend. I selected my victim based on who I thought would have the most entertaining reaction: I’m hoping for a lot of suspicious theorizing as to who did it, why, and what it’s supposed to mean (on that score, I have no clue myself, BTW!). Perhaps I should write on the back of it (“Check “The Internet” for a clue!”). Lol! … better yet if I can express that in the form of a limerick. … Shoot, working weekends will mess with your mind. 😀

  21. KB


    Two questions quite important to this discussion-

    Why an asset in your savings portfolio should necessarily be productive?
    Could you give me examples of assets, which value is based not on the belief that it’s valuable

  22. Cullen Roche

    Well, an asset that creates an output or cash flow stream has embedded demand which gives it value. A farm is not just a bunch of commodities. A farm is a cash flow stream because the commodities are used to create a product that people want. Gold is, to a large degree, just gold. It sits around and looks pretty. Its value is based on much more than just its productive elements. Its value, arguably, has a misguided premium in it because people think there’s something special about gold in terms of its utility within the monetary system. My guess is, if gold were seen purely as a commodity, its value would decline substantially….

  23. KB

    Let’s deal with the productive assets first.
    I see the definition and an example in your response, but I still do not understand why the assets in my portfolio should all be productive.
    You see, a person’s use of assets may be either consumption or delayed consumption. If somebody keeps assets for “future generations” or to burn them on altar of some three-headed deity, it is still consumption/delayed consumption.
    So, “productive assets” it this regard would be a special case of delayed consumption where an owner lends them to somebody in exchange of a lien and cash flow obligation. Thus, instead of just keeping an asset, an owner is forced to be a non-controlling passive businessman. Why do you think it should be the only way to save, i.e. to keep assets for future consumption?

  24. Austerity Sucks

    One point I wish you would have made, Cullen, is that the US economy was so successful in the 19th century because of…SLAVERY.

    It gave us a humongous competitive advantage to generate huge surpluses and corresponding capital inflows that gave us the capital intensity to get a nice jump on the industrial revolution.

    Yes, you’re right we had multiple depressions, but to the extent we were successful it was that we had a fresh country with untapped resources and slaves to exploit the land. So it’s worth mentioning next time a goldbug makes that claim.

  25. quaking

    Hardly. Slave labor was far less productive than free labor and put the South at a competitive disadvantage even when slavery was ended.

Comments are closed.