The Swiss Gold Vote.

Baltic Dry Index. 1153 -34  Brent Crude 70.15

LIR Gold Target in 2019: $30,000.  Revised due to QE programs.

"The great merit of gold is precisely that it is scarce; that its quantity is limited by nature; that it is costly to discover, to mine, and to process; and that it cannot be created by political fiat or caprice."

Henry Hazlitt

Today, a special weekend update for the Swiss voters voting tomorrow on gold. I think it was an error, overkill, to make it impossible for the SNB to sell any gold without another referendum.  There needs to be some flexibility, perhaps only a referendum if the gold percentage dips below 17.5 percent, however, the correct course throughout history, has always been to vote in favour of gold. Sadly, my impression is that the Swiss voters are about to be duped.

Below, the whole article is well worth the read.

"You have to choose [as a voter] between trusting to the natural stability of gold and the natural stability and intelligence of the members of the government. And with due respect to these gentlemen, I advise you, as long as the capitalist system lasts, to vote for gold."

George Bernard Shaw.

Why Citi Bank Chief Economist Willem Buiter’s Attack On The Swiss Gold Vote Is Gibberish

by Thad Beversdorf • November 28, 2014

Normally this time of year I would be out on my land looking to ‘harvest’ some venison for the winter but the 5′ of snow outside my cottage has gotten the better of me today.  Instead I had a read through Zerohedge this morning and found an article  referencing Citi Bank Chief Economist Willem Buiter.  The article basically points out that Buiter is making a fool of himself and the article is quite convincing.  But I want to dig into it a little deeper because I honestly believe this Swiss gold referendum is one of those incredibly important moments in history that have the ability to change the world.  And the fact that guys like Citi Bank’s Chief Economist are pleading with Swiss to vote “No” to their upcoming referendum tells me I’m not the only one that thinks so.   And so I felt compelled to have a look at his arguments and what I found is a bit shocking.

Now Buiter is arguing against the value of gold and thus the value of a central bank holding gold.  Because he is directing his commentary at the Swiss ahead of their referendum he structure’s his arguments to coincide with the 3 stated aspects of the Swiss vote on gold to take place on November 30.  The three aspects of the referendum are as follows.

(1) the Swiss National Bank (the SNB) must hold 20% of its assets as gold, (2) the SNB has to repatriate the 30% of its official gold stock that is now held abroad by the Bank of England and Bank of Canada and has to physically hold all its gold in Switzerland, and (3) the SNB may never sell any gold again.

Buiter provides the following respective conclusions to each of the above aspects and then goes on to explain each conclusion in some detail.

(1) Gold has no intrinsic value but is in a 6,000 year old bubble and it is unsound for a central bank to hold 20% of its assets in any single commodity even if it has some intrinsic value. (2) It is unsound to forego the custodial risk diversification of holding gold in various countries. (3) If the gold holdings can never be sold then it is, in effect, worthless.

Now very quickly we can invalidate most of Buiter’s rebuttals.  Let’s jump to the second and third aspects of the referendum.  Buiter’s rebuttal to second aspect of the referendum to not repatriate gold remaining with foreign nations is premised on custodial risk reduction.  Having lived through the Refco and MF Global implosions I am very conscious of custodial risk.  However, it would seem that holding gold with a foreign bank also carries significant risk.  For instance, when Germany demanded its gold back the US was either unable or unwilling to do so.  And so if there is risk either way, I would choose to be in control of my gold as I have more incentive not to lose it than does a foreign bank to whom it doesn’t belong.

Buiter’s rebuttal to the third aspect of the referendum is that if gold can never be sold they are making it worthless.  Well the referendum is making it so the Swiss National Bank cannot sell the Swiss people’s gold.  The Swiss people will still have a process by which they can sell their gold holdings if it is deemed in their best interest.  And so that is a ridiculous argument.

Let’s now take the second part of Buiter’s rebuttal to the first aspect of the Swiss gold referendum which is that central banks should not hold 20% of their assets in any single commodity.  He really doesn’t support this argument at all.  In fact, he seems to argue that gold and currency are both fiat which he seems to define as something with no intrinsic value.  But if gold and currency are essentially the same asset he doesn’t explain why it would be ok to hold currency but not gold.  Also the Swiss already hold more than 7% of assets in gold and so if it is a problem with the allocation amount, he really does nothing to differentiate between the 7% and 20% so really there isn’t anything in that to refute as he doesn’t give a reason.

But quite ironically what Buiter does do in his attempt to prove that gold is really just a fiat commodity currency no different from any fiat currency is to prove the exact opposite and thus provides the Swiss with the very argument they need to vote “Yes”.

And so let’s have a detailed look at his proof that gold is just another worthless fiat currency.

----To bring this home for the Swiss people.  The takeaway from Buiter’s thought experiment is that because gold is limited and is costly to produce it has intrinsic value.  And because it has intrinsic value it is a much better storage of value than fiat currency.  In fact, Buiter proves that because fiat currency has no intrinsic value that ultimately it will inflate to a zero value over time.   And so Buiter attempted to convince you that a Yes vote for the referendum will leave you with a money stock that is intrinsically worthless, that you will be taking on extraordinary custodial risk and that you will be making your gold holdings worthless.  But what we’ve just done is methodically proven that the exact opposite is true.  That by voting Yes on the referendum you will have a money stock that is a far better asset to preserve value, that you will be reducing your custodial risk and that if you, the Swiss people, decide it is in your best interest to sell gold at some point in the future it will be there for you to sell.  I would conclude that when even the best and brightest economists in the world are at a loss to make a reasonable argument to vote no in the upcoming referendum, it becomes abundantly clear that a “Yes” vote is the right vote.  And I expect a Yes vote in the Swiss gold referendum does more to nudge humanity back on track than any other single event since the fall of the Berlin Wall.

http://davidstockmanscontracorner.com/why-citi-bank-chief-economist-willem-buiters-attack-on-the-swiss-gold-vote-is-gibberish/?utm_source=wysija&utm_medium=email&utm_campaign=Mailing+List+Mid+Day+Friday

"The modern mind dislikes gold because it blurts out unpleasant truths."

Joseph Schumpeter.

The monthly Coppock Indicators finished October.

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