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In this exclusive interview for Matterhorn Asset Management, Robert
Blumen discusses some important but widely misunderstood elements acting on
the gold price. He explains that frequently cited gold demand statistics have
no relationship to the gold price. In addition, he explains that the annual
gold mine production is of very little influence, as gold is hoarded, not
consumed like other commodities.
Robert Blumen was born in 1964 and grew up in Boulder, Colorado,
United States. He is a graduate of Stanford University in physics and the
University of California Berkeley in engineering. He lives in San Francisco,
United States where he works in the technology sector as a software engineer,
specializing in server applications and the architecture of scalable systems.
He has maintained a lifelong interest in the Austrian School of Economic
Thought and is an avid reader in economics and finance. His writings on gold
and a variety of economic topics have been published by Financial
Sense, the Ludwig von Mises Institute, LewRockwell.com, The
Dollar Vigilante, and Marc Fabers Gloom
Boom and Doom letter as well as
other gold and financial sites.
Lars Schall: Mr. Blumen, how did you become interested in the subject
of gold in general?
Robert Blumen: There were two main influences when I was growing up in
the 1970s and 80s. We went through a period of very high inflation in the
United States. President Nixon imposed wage and price controls in a
misguided, or perhaps very cynical, attempt to fight inflation. And Nixons successor, President Ford, handed out
these silly little lapel buttons that said Whip
Inflation Now.
I remember seeing a young man on the TV news who had reported a chain store
for the economic crime of raising the price of one of their products. He was
being given some kind of award for this.
The second historical event
was the gold bull market of the late 70s. Then Reagan came in along with Paul
Volker who he inherited from the former president, Carter. I wasnt paying much attention at the time but
it stuck with me that gold had made this huge move.
Those two things came together
and had a life-long influence on me. From that time I took away a curiosity
about inflation. And that led me eventually to be curious about the whole
field of economics. I was lucky that I came upon the Austrian School of
Economics. I started reading Austrian economics in high school. The Austrian
School emphasized gold as the basis of the monetary system and how well that
has worked out over the course of human history.
R.B.: The report suggests that
the international monetary system will accept gold in a more recognized way
as a reserve asset. I think that this is already true, informally. There are
many signs of this. Central banks have gone from selling to buying in recent
years.
On the intellectual plane, I
think there the consensus of many decades, namely that gold had been
permanently removed from its monetary role, is changing. There is increasing
discussion gold as a monetary metal among the elites. Several years ago, Benn Steil, a CFR economist wrote an opinion piece for the Financial Times (excerpted here) suggesting that the global gold standard worked
better than the current system of floating rates. Robert
Zoellick, who was president of the World Bank at the time, wrote a gold-friendly op-ed also in the FT a couple of years
ago.
L.S.: What is your overall
view on China?
R.B.: The popular perception
of China an economic juggernaut on a path to eclipse the economies of the
developed world. And how did that happen? Because their wise central planners
chose an export-driven growth strategy. Many people now think that this
strategy has gotten them to a point where they are deficient in domestic
consumption, so they need to switch to a consumption-driven mode of economic
growth; and that this also will be accomplished by the same wise central
planners through a series of carefully designed five-year plans.
I think almost everything
about this view is wrong; it is still largely a centrally planned economy and
we know from the economics of the Austrian
economist Ludwig von Mises, central planners cannot allocate resources.
L.S.: Why not?
R.B.: Mises wrote a paper in
1920, which became quite a famous and very controversial thesis in economics
that was debated for decades. His paper was called Economic Calculation in
the Socialist Commonwealth and you can find it for free at the Mises
site.
If you have a very simple
economy where people make consumption goods with their bare hands, this can
be done with central planning. But Mises was trying to explain the economic
growth that has occurred in the world from small villages to vast modern
economies with millions of goods and a complex division of labor. How could
this type of growth occur? The process requires the development of a complex
inter-relationship of capital goods, natural resources, and division of
labor.
In a modern economy, the
number of things that could be produced is nearly unimaginably large. And the
number of different production methods for even a single good is
incalculable. Take gold for example
finding a deposit is quite complex. There are many ways to look for it.
Magnetic fields, chemistry, electrical, drilling. How much drilling and
where? And then, when you have the deposit, should it be open pit or
underground? Should a resource estimate be established first or start mining
and follow the vein? And what about the metallurgy, the chemistry? What type
of electrical power? What types of labor? Refine the ore on site, or
partially refine? Build roads, rail, or ship the ore? There are millions of
decisions and each one needs to be fully answered down to the hire or
purchase of specific pieces of capital and individual workers.
Mises point was that all of these production
decisions, not only what gets produced and what does not, but how its done, can only be decided on the
basis of prices. In particular Mises noted that the prices of capital goods
are crucial to production decisions. Contrary to what you read endlessly in the financial news
about consumption driving the economy, spending on capital goods is the
major part of total spending.
Only with prices can you have
accounting, which is the ability to calculate profit and loss. In a market
economic system, the important decisions are made on the basis of an
anticipated profit and loss, which is the difference between the expected
prices received on sales and the costs.
Mises had the insight that
prices of capital goods are only a meaningful tool for resource allocation if
they are established by a competitive bidding process among entrepreneurs.
Entrepreneurs must choose how much they are willing to pay to acquire a
specific capital asset and hire the skilled workers they need. Entrepreneurs
are people who put at risk their own capital, and will either earn a profit
or suffer a loss.
The diversity of entrepreneurs
is a key part of this. Each business firm or company founder has a unique
view of their own market, which may be highly detailed and based on years of
experience. Mises also noted that each entrepreneur has his idea about what
the customer will want. The market is a decentralized process in which the
entrepreneur who has the best plan for each particular asset, along with some
cash, will end up in a position to choose how that asset gets used.
In my own former job, I worked
for a company that was in a small sub-sector of a sub-sector. There are
perhaps half a dozen people in the world who truly understood our industry,
maybe fewer. The entire world is full of experts like this, people who
understand a particular industry or product really well.
Can you imagine, for example,
that we would have iPhones or Kindles if the technology industry was planned
by a central committee? Before the iPhone, competition in the mobile industry
was primarily over how many minutes per month you got on weekdays or
weekends. When Steve Jobs decided to develop the iPhone, he risked $150 million of his shareholders money and took on the US
mobile industry, who did not want a disruptive phone taking away the
spotlight from their monthly plans.
Central planning means the
abolition of this type of competition. And that is the problem that Mises
identified. There is no way to replace this competitive bidding process with
a single planner or a planning committee. The central committee cannot bid
against itself for the opportunity to acquire specific capital goods and
labor. That would be nothing more than the left hand bidding against the
right hand. They could assign fake prices to resources and pretend to
calculate the best projects, but the numbers that would come out of this
process would not be prices, they would be arbitrary numbers that did not
reflect the best possible use of scarce productive resources. Mises showed
that a central planner has no basis for making economic decisions, even if
the process did not become entirely politicized, as it always does.
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