Following the Panic of 1907, John Pierpont Morgan was called to testify before Congress in 1912 on the subject of Wall Street manipulations and what was then called the “money trust” or banking monopoly of J. P. Morgan & Co.
In the course of his testimony, Morgan made one of the most profound and lasting remarks in the history of finance.
In reply to questions from the congressional committee staff attorney, Samuel Untermyer, the following dialogue ensued as recorded in the Congressional Record. Untermyer:
I want to ask you a few questions bearing on the subject that you have touched upon this morning, as to the control of money. The control of credit involves a control of money, does it not?
Morgan: A control of credit? No.
Untermyer: But the basis of banking is credit, is it not?
Morgan: Not always. That is an evidence of banking, but it is not the money itself. Money is gold, and nothing else.
Still, most mainstream economists dismiss gold. They call it a barbarous relic and say it has no place in today’s monetary system.
But today, I want to remind you of the three main arguments mainstream economists make against gold and why they’re dead wrong.
The first one you may have heard many times. “Experts” say there’s not enough gold to support a global financial system. Gold can’t support all the world’s paper money, its assets and liabilities, its expanded balance sheets of all the banks and the financial institutions in the world. They say there’s not enough gold to support that money supply.
That argument is complete nonsense. It’s true that there’s a limited quantity of gold. But more importantly, there’s always enough gold to support the financial system. The key is to set its price correctly.
It is true that at today’s price of about $1,881 an ounce, pegging it to the existing money supply would be highly deflationary.
But to avoid that, all we have to do is increase the gold price. In other words, take the amount of existing gold, place it at, say, $14,000 or $15,000 an ounce, and there’s plenty of gold to support the money supply.
In other words, a certain amount of gold can always support any amount of money supply if its price is set properly. There can be a debate about the proper gold price, but there’s no real doubt that we have enough gold to support the monetary system. I’ve done that calculation, and it’s fairly simple. It’s not complicated mathematics.
The important part to remember is that there’s always enough gold to meet the needs of the financial system. You just need to get the price right.
The second argument raised against gold is that it cannot support the growth of world trade and commerce because it doesn’t grow fast enough. The world’s mining output is about 1.6% of total gold stocks (global gold production has actually flatlined at around 3,300 metric tonnes for the past several years). World growth (leaving 2020 out because of COVID) is roughly 3–4% a year.
It varies, but let’s assume 3–4%.
Critics say if world growth is about 3–4% a year and gold only grows at 1.6%, then gold doesn’t grow fast enough to support world trade. A gold standard therefore gives the system a deflationary bias. But that’s also nonsense, because mining output has nothing to do with the ability of central banks to expand the gold supply.
The reason is that official gold, the gold owned by central banks and finance ministries, is over 35,000 tons. Total gold, including privately held gold, is about 180,000 tons. That’s over 145,000 tons of private gold outside the official gold supply.
If any central bank wants to expand the money supply, all it has to do is print money and buy some of the private gold. Central banks are not constrained by mining output. They don’t have to wait for the miners to dig up gold if they want to expand the money supply. They simply have to buy some private gold through dealers in the marketplace.
To argue that gold supplies don’t grow enough to support trade is an argument that sounds true on a superficial level. But when you analyze it further, you realize that’s nonsense. That’s because the gold supply added by mining is irrelevant since central banks can just buy private gold.
The third argument you hear is that gold has no yield. That’s Warren Buffett’s main criticism of gold (even though he’s now invested in a gold stock). It’s true, but gold isn’t supposed to have a yield.
Gold is money. And money doesn’t offer a yield.
I was on Fox Business with Maria Bartiromo once. We had a discussion in the live interview when the issue came up. I said, “Maria, pull out a dollar bill, hold it up in front of you and look at it. Does it have a yield? No, of course it has no yield, money has no yield.”
If you want yield, you have to take risk. You can put your money in the bank and get a little bit of yield — maybe half a percent. Probably not even that. But it’s not money anymore. When you put it in the bank, it’s not money. It’s a bank deposit. That’s an unsecured liability in an occasionally insolvent commercial bank.
You can also buy stocks, bonds, real estate and many other things with your money. But when you do, it’s not money anymore. It’s some other asset, and they involve varying degrees of risk.
The point simply is that if you want yield, you have to take risk.
Physical gold doesn’t offer an official yield, but it doesn’t carry risk. It’s simply a way of preserving wealth. Gold is money.
So the three mainstream criticisms of gold don’t hold water once you actually analyze them properly.
Why should you own gold now?
The two great bull markets were 1971–1980 (gold up 2,200%) and 1999–2011 (gold up 760%). In between these bull markets were the two bear markets (1981–1998 and 2011–2015), but the long-term trend is undeniable. Since 1971, gold is up 5,000% even after the bear market setbacks.
Now the third great bull market is underway. It began on Dec. 16, 2015, when gold bottomed at $1,050 per ounce at the end of the 2011–2015 bear market. Since then, gold has nearly doubled. That’s a nice gain, but it’s small change compared with 2,200% and 760% gains in the last two bull markets.
When it comes to capital and commodity markets, nothing moves in a straight line, especially gold.
But this pattern suggests the biggest gains in gold prices are yet to come. And right now, my models are telling me that gold is poised for historic gains as the third great bull market gains steam.
I always say that at least 10% of your investment portfolio should be devoted to physical gold — bars and coins primarily. Then put your feet up and relax.