Gold, born only in dying moments in the hearts of stars, and blasted out across the universe in supernovae, just keeps going up & up & up, rising today to a meteoric peak of $1684.70:
The question that many commentators ask is why? Why does this “barbarous relic” — as the highly influential economist John Maynard Keynes put it — keep rising and rising, defying the expectations and predictions of so-called experts? Non-mainstream economists belonging to the Austrian School say that its scarcity — stemming from the fact that humans cannot just print more of it — make it a perennially strong and robust measure of value. The fact that it is portable, splittable, difficult to counterfeit and widely accepted across cultures, they say, means that it is the ultimate money. And this was legally the case up until 1971, when Richard Nixon defaulted on the Bretton Woods agreement that tied the value of the dollar to the value of gold at $35 an ounce. This has left all currencies in the world — including the dollar — as backed only by the word and might of their issuer. For America, this does not look good. As I noted just days ago:
America principally manufactures three things: Treasury Bonds, consumerism and weapons.
Governments have freely printed and distributed money, in the belief that more circulation will lead to more productivity, more productivity will lead to more economic gains, and economic gains will lead to long term prosperity. There is also the belief that printing money stabilises the economy through making debt easier to repay. Mainstream Keynesians say that gold’s epic run to astronomical prices is merely a short-term side effect of weak confidence in markets.
Only last month, Federal Reserve Chairman Ben Bernanke, representing the mainstream view, and Congressman Ron Paul faced off over gold:
Paul: ‘The price of gold today is $1,580. During these last few years the dollar was devalued almost 50%. When you wake up in the morning, do you care about the price of gold?”
Bernanke: “Well, I pay attention to the price of gold but I think it reflects a lot of things. It reflects global uncertainties. The reason people hold gold is its protection against what we call tail risk … they have gold as a protection.”
Paul: “Do you think gold is money?”
Bernanke: [Long pause] “No.”
Bernanke stated his belief that gold is an asset and that central banks hold it as reserves. Paul demanded to know why the Fed didn’t hold diamonds as an asset instead of gold if it wasn’t really money and Bernanke, who seemed stumped, said it was a “long term tradition.”
The truth is that over decades and centuries, no money that is freely printed and which exists solely on confidence in a human authority has ever survived. The dollar, the most widely traded and widely held currency in history has lost 96% of its purchasing power since a century ago. But gold is independent of human authority. Its value derives, at least in part, from its atomic structure, the fact that it cannot be manufactured, and its long history as money and use as a medium of exchange and store of value. Gold is rocketing into the sky because currencies are being widely devalued in the so-called currency wars and the race to the bottom.
The real question is when, and how will the end game arrive, and how far will gold rise? If held to be the true monetary base, gold’s value is something like $6,000 an ounce, and that is only likely to rise as more fiat money is created. I don’t have the answer to the other questions, but it seems increasingly likely that gold — specifically a new international gold standard — will play a part. Citizens, businesses and creditors demand and deserve a currency which is not gradually debased. In 2006 — when gold was less than $1,000 an ounce — MoneyWeek editorialised:
Gold is not a barbarous relic because gold communicates value today as effectively as it did 50 years ago and much better than does the United States dollar. In contrast to national fiat currencies today, gold tends to hold its value; in other words, the purchasing power of gold remains relatively unchanged. In fact, this precious attribute of gold is timeless because the above-ground stock of gold grows approximately at the same rate as world population growth and new wealth creation.
There is indeed a barbarous relic: central banking itself. Central banks are barbarous in part because they conspired to put an end to Newton’s brilliant invention — the gold standard — that safeguarded sound money for 200 years. However, it is the process of central banking itself, as it has come to be practiced, that deserves the greatest public wrath.
“Gold is the leash on which the frugal must keep the prodigal”
> scarcity — stemming from the fact that humans cannot just print more of it — make it a perennially strong and robust measure of value.
> The fact that it is portable, splittable, difficult to counterfeit and widely accepted across cultures, they say, means that it is the ultimate money.
Not scarcity! It is the metal’s Abundance especially relative to annual production
and annual industrial consumption that distinguishes it from all other metals. In effect this puts the gold supply beyond anyone’s power to change drastically or quickly.
Fekete also instructs us that gold is the item with the slowest declining marginal utility.
As individuals work down to the lowest utility uses of any abundant good, we end with pure surplus that is only worth what you can get in trade for it. Gold, being the most ‘marketable’ and most ‘durable’ item has the most staying power at this tail end of the declining utility curve. For practical purposes it has constant marginal utility, we hardly use it for anything else! And in moments like these it is the most ‘hoardable’ commodity (no expiration date, value-dense). Holding gold is the citizen’s effective protest against too low, zero, and now negative yields on savings.
You make a good point. However it’s not abundance; more non-consumption as you later go on to clarify. This is why gold has much more “moneyness” than silver.
Hey, kliler job on that one you guys!
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