Interest on Gold Is the New Tempest in a Teapot

Zero Hedge published an article on Canadian Bullion Services (CBS) last week. Other sites ran similar articles. The common thread through these articles, and in the user comments section, is that CBS is committing criminal fraud. Or, if not, then it’s a conspiracy by the Canadian government to confiscate gold. Terms like fractional reserve and re-hypothecation were dusted off for the occasion.

I don’t know anything about this company other than what I read that day. I am writing today to make a different point, not to address or defend CBS.

My point is: a company offers interest on gold, and the gold community goes ballistic. Why so visceral a response? To answer that, we need to look at the backdrop of today’s bizarre financial world.

Interest rates have been falling for well over three decades. This has caused endless asset bubbles in which to speculate to make a fortune (or lose one). And now, in the terminal stage of our monetary disease, there is scant yield to be had even in the US. Negative yields already prevail in several other countries.

We have become accustomed to it. We’re trained to not expect to earn interest, to not even think about it. Instead, we’re like Pavlov’s dogs who know to salivate at the sound of a bell. Only we’re not after food, but opportunities to speculate. All we want to know is, what’s going up next. Mainstream folks prefer to speculate on mainstream assets like stocks and real estate. Gold bugs would rather bet on gold and silver. Either way, it’s the same: seek capital gains by the rising dollar price of an asset. Yield is as dead as the rotary dial telephone.

And, we’re beyond merely accustomed. People demand speculative bubbles. It feels right as rain—or the next dose of opiate painkillers. Besides, speculation is how you get rich quick. Especially with leverage. Interest is boring and slow.

As those articles I mentioned earlier show, many people who are accustomed to demand speculative capital gains are actually offended at the very promise of a yield. It’s cognitive dissonance. If speculation is how we are supposed to make money, then interest is a vestige of the old normal. It’s like a thorn under your skin that you can’t get rid of, an annoying reminder.

This touches on a point I frequently make: gold does not go up or down. It’s the dollar that goes down or up. However, if this is true, then there’s a problem: how can you speculate on gold? I think so many people are so insistent on measuring gold in dollars for a simple reason. They want gains.

They want gold to go up, so they can get rich. This requires something to use to measure gold. If gold is going up, then compared to what? The dollar!

Perversely the fiat dollar suits the gold bugs as well as it suits the Federal Reserve (though for different reasons). Both believe that if everyone is forced to use the dollar as the unit of account, then they benefit from rising asset prices.

After the fiat dollar, what comes next? There are two possibilities. One is a normal world where gold is used as money, and people can earn a return on their gold. The other is collapse into a new dark age. Even in a dark age, gold is money all right. It’s just that no one wants to risk getting killed for his metal.

There’s nothing intrinsically wrong with borrowing, lending, or earning interest. In fact, the loan is a win-win deal. It benefits the business who borrows in order to produce the things that people want. And it benefits the saver and retiree who lend to earn an income on their savings. Productive lending is an integral part of the gold standard.

18 replies
  1. coastalcruiser says:

    If I were you I would yank this article, and think about what you are saying for a week or so.

    The terms like fractional reserve and re-hypothecation were dusted off for a reason. You are assuming the commenters on those CBS pieces are more interested in “gains” than interest. That may or may not be true, but your assertion has nothing to do with their objections.

    If you don’t think fractional reserve and re-hypothecation fit, then how about “return OF capital as being more important than return ON capital”? Or how about the fear of what happens when the music stops?

    Why would people be so paranoid? History…. pooled accounts… counter-party risk. People want a safe storage for their MONEY, which as they see it is gold. This has nothing to do with gold’s convertibility to USD. It has to do with preservation of wealth.

    People have learned that they can’t trust any other party to have their gold at will-call when the gold is actually needed as MONEY. The safe deposit box at the bank can’t be trusted… the bank breaks into your box on the flimsiest of reasons. Monex and its ilk can’t be trusted… they don’t keep 100% of its customers gold on hand at all times. If the music stops, someone’s not going to have a chair. The commenters don’t want it to be them.

    I personally keep my Mercury silver dimes buried in the yard because when they were in circulation they bought a loaf or two of bread. Currently, they buy a loaf or two of bread. And as a wealth preservation vehicle I expect they will buy a loaf or two of bread if/when the dollar is no longer trusted.

    For some reason the CBS article hit a reflex in you, and the wrong leg extended.

    • Baron says:

      I have to agree with you and also to a certain extent with Keith.
      Keith says quite rightly that Gold stands still while fiat loses value.
      To my mind Gold actually increases in value as time goes by because human ingenuity and efficiency makes the cost of producing things go down. So fiat may lose value but most other things also cost less when measured in Gold. Just think of TV sets for example.

      • Baron says:

        ps. I forgot to add that you can pay interest on Gold if you are in a World where Gold is accepted as currency. I loan you a certain amount of Gold to buy a House and you promise to pay back the Gold plus extra grams for the time you hold my Gold debt.
        Unfortunately in the fiat currency World all you are doing is selling the Gold for fiat to do the transaction…….. Isn’t this what the crooked banks and crooked enterprises do?

  2. Phiegze says:

    I no more want gold “go up” than I want to use as gun.
    Nonetheless, it seems both are better protection than the Constitution.
    Which of the three can’t be torn up?

  3. matus says:

    I am not sure if you are right particularly in this “They want gold to go up, so they can get rich. This requires something to use to measure gold. If gold is going up, then compared to what? The dollar!“ However I understand your point what you mean. BUT.
    I think that I have no other chance to perceive if I am more or less wealthy. Today we have only one possibility to measure things via fiat currencies. Our “personal bookkeeping” is based on them; we state gold ratio to silver, oil (to whatever else) via them and not directly. So once the gold relative to other assets is up and I change these assets with gold (in the way that first I sell gold for dollars and then use these dollars to purchase some other investment title) I can consider myself (according to my personal preferences of course) as more rich. I do not see this as a problem.

  4. ankursethi108 says:

    I am surprised you have not mentioned the gold monetization scheme of India. It was announced a few months ago as a way to “use” India’s gold, especially the gold hoarded by temples which is already in bullion form. The Indian government wants to reduce outflows of currency by taking deposited gold and selling it within the country (In fiscal 2015, India imported $34.4 billion worth of gold, a 20% increase over the previous year.). In exchange they give interest paid in grams of gold.

    The gold gets tested and melted and the interest rate is 2.5% (paid in gold on withdrawal). One has to trust the government banks for this though!

  5. Theosebes Goodfellow says:

    ~”Why so visceral a response?”~

    Because trust in the system took a hit with MF Global. Because if the sanctity of segregated accounts stands for nothing, the individual has to become the segregator of last account. Jon Corzine is a free man. He made over a BILLION U$D disappear. Think about it. One billion dollars.

    CBC is offering a return rate of 4.5%/annum on a minimum deposit of 10 ounces gold, 500 silver, if you stay parked with them for 3 years. On the surface it seems to be a fair enough offer, presuming, of course, that you think and believe that the world will remain something resembling sane in that time period. Or to put it another way, if you don’t believe that we will see vicious inflation, (massive devaluation in the U$D), in the next 3 years.

    You are correct that ZHers are a jaded lot. Most of them are so due to the school of hard knocks, having taken a relatively respectable ass whooping since the turn of the century, at least in the financial markets for of all things, trusting a brokerage. The rest are an odd lot of gold bugs, gold bugs wanna-bees and sad sacks living in their grandmother’s basement, (seeing as their mom is still doing time with the state on a previous drug conviction). Okay, that was a bit harsh, (and humorous). The point being that most of the Project Mayhem crew do not think that the US buck has 3 years at ZIRP, much less at NIRP.

    For my part I have to side with them. I have been reading too much James Rickards to think this is all going to “sort itself out”. With the choices of Donald Trump, (a flip-flopper of first rank), Hilary “What difference does it make?” Clinton and possibly Ted Cruz, (whom I like but whose wife is owned by the vampire squid, (Goldman Sachs), and even more remotely a man who takes pride in claiming he’s a socialist, of all things, Bernie “I will raise taxes on EVERYONE” Sanders, you can see why there is a certain segment of the population who is not filled with any particular measure of faith in the near future, vis a vis finacial security.

    So to entrust a counterparty with a portion of my stack for the next three years and think that a) all it can earn is a 4.5%, (compounded, one would presume), and b) that real inflation, (measured in gold of course), will be less, would have to be limited to an amount that I would be willing to lose if ANYTHING goes wrong. Lastly, part and parcel of said loan would have to include definitions of what was loaned and what is expected back, (no Gold Eagles please, you can stuff your seniorage and silver impurities, I’m a .9999 fine guy). With the CBC deal, I would expect that it is all gold Loonies, (Maples). And remember, all of this for a return of .71 ounces. Free Jon Corzine! /sarc

  6. freedomroad says:

    If one loans ones gold out one relinquishes some critical advantages of gold ownership – one now would enjoy counter party risk, be inside the fiat system, and ones gold is now on record w gov’t. hmmm. Anyone going for this deal – I have a bridge I can let you have real cheap!

  7. mdm77 says:

    Money breeding money. The age old question of, is it moral and just? Adding fractional reserve banking into the mix only compounds the results of interest seeking (moving wealth from the bottom to the top more rapidly). In the real world of fractional reserve banking, loans are made without thought of reserves (i.e. thin air) and the deposits comeback in later to fulfil the reserve requirements. The system kept going by more credit expansion. That is why it is so objectionable to the majority of people. Using physical gold would slow the credit expansion as you need to have the gold before making loan. However while fiat reigns it will drive out the good.

  8. kaplan_cpa says:

    Shouldn’t we be questioning what is the current gold lease rate and why would CBC pay 4.5% on a 3 year term.

    What interest does CBC need to earn to cover administrative expenses, the cost of the gold hedge, and a profit? Is the gold loan market limited to lending physical to jewelers, and otherwise all other borrowers need currency?

    If CBC is borrowing long term (3 year minimum) and lending short term does this change the risk profile?

  9. Keith Weiner says:

    Thanks for all the comments everyone.

    I can see that there are many unaddressed questions:
    1) does FRB mean printing money out of thin air
    2) does lending or FRB transfer wealth from the poor to the rich
    3) is money lending immoral
    4) does gold borrowing necessarily mean selling it to bet on falling price or hedging
    5) does gold lending necessarily expose you to the fiat dollar
    6) does a small company have access to gold at the gold lease rate

    I thought I had written something about the Indian gold scheme, but maybe I didn’t publish. From what I can tell, it looks like India is trying to fight the decline of the rupee by cutting back its trade deficit. It wants to reduce gold imports. How? By borrowing its citizens gold. To do what? To sell it to Indian buyers(!) If this is so, then the program is fraud by its very design.

  10. bbartlow says:

    Ok, sounds like Keith might be back on his meds. 🙂 But I can understand why he loses it (as do I) because the world is so SO messed up right now, it’s easy to launch into a fully justified rant on occasion. Might just be a good idea to tell people it’s a rant and that’s you’re blowing off steam. And the preacher shouldn’t forget — he’s preaching to the choir here. Right?

    I agree about India, fraudulent by its very design, as SO MANY of these leasing programs have been over the years, where gold mysteriously (or not) disappears from investor’s accounts.

    Think about it: Counterparty risk — et al — is one of the reasons to own gold in the first place. So why not maintain absolute control and possession of it at all times? Perhaps there will be a time and place when that won’t be necessary, and we can safely loan gold money out at interest. But in today’s world…. when gold is the only money to be found?

    Isn’t it interesting that gold is higher again today (3/3…Thursday) despite a stable dollar all week, at least stable when comparing fiat to fiat… haha. So I’m sure gold’s relative strength is very confusing to many.

    On a practical matter, I follow gold in dollars because I intend to trade gold for dollars in the future for living expenses. Is that a sin? Is it also a sin to be more excited about trading fiat for money (gold) when my analysis suggests that money is at a relative discount to dollars?

    Almost sounds like it is. I’ll wait to hear from the Preacher on that one.

    Personally, I take risk everyday as part of my trading business. So to me gold isn’t speculation. Oh sure, everything involves some type of speculation or risk, but in the case of trading fiat for gold — not as a trade but as a long term store of value — I feel there is no other choice. There really is no alternative. The dollar is a fraud and a certain, (i.e., 100%) loser over long periods of time. At least with real money I maintain a position in reality. So I’ll take my chances on a truth instead of a lie, although in today’s world, sadly, lies often Trump reality.

    For now we are stuck with dollars as a payment system aren’t we? It’s natural, therefore, to think in terms of dollars. I don’t see anything wrong with that, especially talking to a hard money crowd that knows the truth.

    • Baron says:

      I can understand why people quote the $US as a yard-stick as most commenters seem to be US based. I always look at the British Pound because that’s where I’m from. I should imagine a Russian looks at it from the Rubble perspective and at this moment feels a lot richer holding Gold than those around him.
      So we may argue that Gold stays still but the feeling and reality of ‘richness’ rises and falls against it.

  11. Carpenter says:

    I can see that there are many unaddressed questions:

    1) “does FRB mean printing money out of thin air”

    All federal reserve notes are borrowed into existence

    2) “does lending or FRB transfer wealth from the poor to the rich”

    To the extent that lending by the federal reserve creates inflation,
    and to the extent which said inflation:

    A) Benefits those with first access to money
    B) Benefits those who own real assets
    C) Benefits those with enormous debt loads.
    D) Benefits those who own the means of production.

    3) “is money lending immoral”

    In and of itself, absolutely not.
    However, lending which adversely affects society is immoral.
    (See “odious debt”)

    4) “does gold borrowing necessarily mean selling it to bet on falling price or hedging”

    Not necessarily, however a falling price is to the borrower’s advantage.
    Leased gold is sold into the market, and the proceeds are invested.
    Leasees expect to earn a profit in the margin between the lease rate and their ROI.
    A higher cost to replace leased gold decreases that margin, lower prices increase it.

    5) “does gold lending necessarily expose you to the fiat dollar”

    In as much as the leasee’s return on investment is in fiat.
    Not necessarily the U.S. fiat dollar, but fiat nonetheless.

    6) does a small company have access to gold at the gold lease rate?
    I do not know, but at current rates, and with the prospect of perpetual rollovers, I’m willing to borrow as much as banks are willing to lend.

  12. Koos Jansen says:

    Isn’t the value of gold at any point in time equal to how much goods and services you can trade it for? So, on a week on week basis yes, gold does go up and down. However, on a decade on decade basis gold is constant and the dollar goes down.

  13. Leland says:

    Gold is one of the most hoarded assets in all human history. As a source of capital, lending it makes a lot of sense. I understand that people who don’t trust anyone don’t want to lend their gold, but as for the rest of the world who actually want to function in reality, it is a great idea.

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