Here’s a reading of A New Case for Gold and how it might apply to financial independence portfolios.
This post contains affiliate links. If you click on the book pictures, you can buy the book on Amazon and I get a commission from them. You can also probably convince your library to order the book if you don’t want to pay money.
This is the book – clicking it will take you to Amazon.
Why do you keep posting about gold?
Critics of this awesome and powerful financial independence blog are right to point out that I post a disproportionate amount about crypto, gold and saving/budgeting compared to index funds.
One reason for that is pretty much because index fund investing isn’t that complicated to understand. Honestly, it doesn’t need to be much more complex than my post on Exchange Traded Funds.
Another reason is that you can get that kind of content anywhere. I’m not adding much value to the world by regurgitating the same stuff over and over.
The final – and biggest – reason is that I absolutely believe in diversification across asset classes. I don’t agree with the general consensus that index funds are inherently safe, in that markets do fluctuate and I intend to become permanently financially independent, not just free-if-the-market-permits-and-the-next-50-years-are-as-good-as-the-last-100.
With this in mind, today’s review is on a book written by a well-known gold bug, James Rickards.
The gist of the book
Like most gold books, the main premise of The New Case for Gold is that fiat cash is effectively a government swindle.
If you don’t know what I’m talking about in this part, my post on how money is made should help!
Fiat cash, i.e. pounds and dollars and so on, is effectively a promissory note about debt. On the face of it, that note means nothing and is backed by nothing. You can’t exchange it directly with the issuer for, say, silver or gold.
However, what makes this book different is that James argues that the world is in fact on a gold standard, but it’s just a hidden one.
Wait, what? A quick primer on the gold standard
Up until 1914, your £1 coin was in fact a gold sovereign. £1 was 7-and-a-third-ish grams of gold. This started in the Napoleonic Wars, but only as a replacement for a previous gold and silver coin standard. That version stems back to ancient civilization, in various forms.
The disadvantage of a gold standard is that your government can’t create more money when it needs it. Not without more gold. Which is a problem if your country is, for example, fighting a war across Europe and needs to issue lots of cash to feed a war economy.
Interestingly enough, the US continued to be on the gold standard until, erm, Vietnam. Well, sort of. Good enough for this blog, anyway. Nixon officially removed the eg in 1973.
This is an important concept for the main and most interesting argument of this book.
The best part of the New Case for Gold
The most interesting argument is that fiat cash isn’t as far removed from the gold standard as one would believe.
Rickards writes as an American, so his focus is on the US Federal Reserve. I can’t be sure that the same argument will flow for the Bank of England, but I suspect that it might. In fact, if you think it won’t, be kind and leave an explanatory comment at the end.
The argument is that the US Federal Reserve maintains its balance sheet entirely because of its gold reserves. This ultimately extrapolates (cool word, should use it more) to the idea that the dollar is in fact based on a gold standard. That is, the dollar value itself isn’t based on the gold price, but ultimately the dollar is trustworthy because any balance of trade could be paid in gold if it really needed to be. More simply, Rickards says that the big stockpiles of gold (famously, Fort Knox) are what keep the Federal Reserve solvent, and feature on its balance sheet as such via a reference to a security.
That’s a brief summary – the version in the book displays the evidence and sets out the argument fairly cogently.
Hang on – that can’t be right. How does it explain inflation?
Like most gold bugs, Rickards is highly critical of fiat cash, which can be inflated at will (well, sort of) by central banks and government monetary policy. I’ll admit that I have some sympathy on this point.
The New Case For Gold addresses this issue directly. According to Rickards, the de facto gold standard implies that inflation of the fiat cash supply is simply a debasement of currency that has become normalised.
Debasement is another term that comes from gold standard days. The idea is that unscrupulous rulers back in the past could add more lead/copper/ other base metals to the gold pot to make more coins. The coins would therefore contain less gold when cast, i.e. would be more base metal.
So, like many gold bugs, for Rickards fiat cash is simply a way to devalue cash so that more can be built/paid for with the same amount of resources. In this model, inflation is just theft from savers, disguised as a growing money supply.
Overall thoughts on the New Case for Gold
This is quite a short read and is clearly intended for a mass audience. I think it took me about five nights to read it on Kindle.
I’m not sure where I necessarily sit on modern monetary theory, so this did appeal to me as a concept. That said, it is very US focused and clearly only considers gold/silver as being a suitable monetary replacement.
UK readers should know in advance that gold and silver as money is an emotive subject in the US for a few reasons, such as the confiscation of gold from the public in the 1930s and early US laws specifying that only silver could be used as currency.
I don’t know if this will apply to the Bank of England. It might be something I look at later in this blog, but for now you’ll need to make do with this book review!
Overall: I enjoyed reading some of the arguments in this book, and would recommend it to any financial independence reader who wants to assess whether gold ought to be in a diversified portfolio.
How I use this in my financial independence campaign
I do hold gold in my portfolio, but in small amounts. I aim for 5-10% in it.
Like Rickards, I can see the problems with a fiat money supply. Inflation makes sense if your economy grows with the inflation rate, but I don’t agree with the presumption that it necessarily does. If it did, why wouldn’t interest rates remain level (or near level) forever? What would be the sense in playing with them to stimulate growth?
That’s not to say that inflation is all bad. I’m not nearly educated enough to make a call on that. I just think that it’s a problem with the fiat money (i.e. the £) that I need to think about. When I set off for financial independence and live off my portfolio, I don’t want to be screwed over because the politics of the day led to massive inflation!
That being said, buying and selling gold comes with issues, which is why I wrote this earlier guide on it.
Unlike Rickards, I’m not necessarily convinced that gold is the only sound money choice. It’s certainly an effective one, but I’m waiting to see how crypto performs in the long run before I conclusively come down on the side of this debate. For my portfolio, which is mainly made up of investments anyway rather than money, I use it as a diversification tool, as it is generally uncorrelated to the value of shares. Well, sort of. My post on diversification should explain that a bit better.
If you decide that this book is something that you want to read and you want to support this blog, below is an affiliate link that gives me a few pennies of Mr Bezos’ space exploration fund if you buy through Amazon. Shameless, I know!
