Posted on 12/01/2005 10:40:52 AM PST by .cnI redruM
NOTHING swells the breast so much as the thought that you have been proved right at last. After riding high at the start of the 1980s, gold bugs had a miserable couple of decades. The price declined relentlessly, mocking their credo that the security of the financial system ultimately depends upon the yellow metal. Lately, though, the faithful have enjoyed their reward. In the past five years the price of gold has doubled. This week in Asian trading it briefly surpassed $500 a troy ounce—a level last breached in 1987. You can almost feel the bugs' excitement as the message sinks in: gold is back.
This being gold, the resurgence has brought forth all manner of alarming prophecies. The price is an omen of rampant inflation; bonds are doomed; the dollar is about to fall prey to the United States' reckless deficits; the euro will shortly be revealed as a worthless creation of bureaucrats.
The world is an unpredictable place. But, with the possible exception of a fall in the dollar, not much of the above catalogue of doom looks likely; and none of it has much to do with gold's good run. The dull truth is much less bullish for gold. Investors have put money into a wide range of metals, and precious metals' prices, including gold's, have risen with the base. Meanwhile, gold remains fundamentally unattractive. It yields nothing and central banks are sitting on vaultfuls of the stuff that they want eventually to sell. Gold bugs hope that $500 is the threshold at which mainstream investors will start once again to take an interest in the metal. Caveat emptor.
Advertisement The fascination of gold lies in its being not only a commodity but also a store of value and means of exchange. The glamour and the mystique lie in the latter, monetary part. This is what draws gold bugs, but their story doesn't quite add up. The unbalanced world economy still faces risks. But the most recent rises in the gold price have come against a strong dollar, which is normally a sign of weaker gold and continues to confound warnings of a collapse in the greenback. Oil prices are plainly far higher than they were, but they have come off their peaks. Moreover, there have been few signs so far that oil prices are feeding through to a 1970s-style stagflation. Nothing in either bond or stockmarkets suggests that investors see much danger of such a thing happening.
Bear on bullion Gold's renewed shine is best explained by thinking of the metal not as money but as a commodity dug out of the ground. In the past few years the price has climbed because mining companies stopped locking in prices by selling gold in advance—in effect, withdrawing a huge source of supply. Even then, gold has captured only 40% of the gains of other metals in The Economist's metals index, which has almost doubled since the start of 2003 thanks partly to fundamental demand from emerging markets and partly to investors in search of better returns than those from other assets. Gold would have done better had Chinese demand risen as fast as some expected; in fact, figures from GFMS, a consultancy, suggest it has been flat, even falling, over the past 20 years. Chinese investors now have other places to put their money.
Gold is still cheap compared with its peak of $850 in 1980. Today, adjusting for changes in American consumer prices, it is worth only a quarter as much. Gold bugs might see that as a chance to buy; others as a reminder of gold's enduring capacity to disappoint.
Inflation is not the general problem of a gold standard. DEflation is the overriding problem which makes it an outmoded regime. Governments will never allow the economies to be stifled by that method.
When Hamilton started his financial system to get the United States back on its feet he actually sold something MORE valuable than gold, the Word of the United States Government. Instantly gold flowed into the country and it started its unparalleled rise to prosperity and power. That rise was accomodated by the inability of the British economy to employ enough English and Irish. They were forced out of Great Britain and provided much of the labor power required by the American growth. English capital could not be employed profitably in the Isles but it could be here. Much of our growth, particularly the railroads, was financed by English capital. The America being on a bimetal standard did little to help that process.
Prices in terms of labor power are not the same in 1790 as 1910. Your description of the gold window operations are reversed. When people are buying gold the money supply is deflating (less money is in circulation) when people are selling gold the money supply is inflating (more money is in circulation).
Friedman's solution was to set the money creation machine on autopilot and create money at a fixed rate per year not to return to the gold standard. This is, naturally, not as easy as it sounds. There is so little gold available there would be a small amount per capita far too little to provide sufficient liquidity for economic activity.
Our inability to remain on the gold standard came about because of the method Johnson used to finance the war in Vietnam. And it has not been all downhill from there. Our standards of living have continued to rise and we are still the world's most prosperous nation. After the tie was cut it took some years to adjust and that adjustment had to go through major non-monetary economic blunders. But these mistakes and results are not necessarily a result of central banking. Rather political decisions overriding them.
I believe Greenspan uses gold as one indicator.
Buying a loaf of bread with gold might prove problematic. Two bucks would be about a gram.
Gold as a money supply does indeed evaporate. It is worn away at a measurable rate per year and the more it must circulate the faster it will wear away.
And $850 in 1980 would only be worth $396 in 2005 thanks to the loss of purchasing power, even at 3% inflation.
That price was due to two famous brothers trying to corner the metals markets.
Did I offend you?
You are comparing apples to oranges. The bust of the dot.com boom was brought about by the "irrational exuberance" of throwing money at worthless companies. Many of these companies were simply in the "idea" stage and had no plan for how to make money from their ideas. It was a bubble in the truest sense of the word.
Gold, on the other hand, is a commodity with worldwide marketability and demand. However, holding it produces no return to you through dividends and compound returns. If you start with 100 oz, you end with 100 oz. The only way to make money off of gold is to buy when it's low and sell when it's high. As many others on this thread have pointed out, similar to the dot.com irrationality, people couldn't buy enough gold at $800/oz in the early 80s. These people earned nothing off of this investment in 20 years until the recent resurgence of interest. Meanwhile, even a portfolio of stocks and bonds bought at random would have likely given them nearly 10 times their original investment... even through the dot.com bust.
Added factors include the fact that there is still ample gold to be found through mining, when the price is high enough to support the expedition, and many countries have high stockpiles to unload when the price is too tempting. Both of these factors alone will limit the upside potential of this particular commodity.
I haven't advocated here that people buy growth stocks or any other investment. I have simply had an economic discussion regarding a particular metal.
Gold backed notes do not cause any wear on the gold. And we can use silver and gold for coin. Sorry Charlie, next time don't make a fool's argument and claim it comes from someone else's mouth.
No of course not. And no I do not believe the conventional wisdom of buying random stocks as guaranteed value, since it appears to me most companies fail and their stocks tank. Gold is a good countercyclical investment that is always there in every turn of events from Tulip mania to dot-com bust. But then again when I look for a stock to buy I look for dividend yield SBC 5%, DUK 4.5% are my types. I'm a fuddy duddy.
Don't know exactly what it is about gold that produces that reaction, but I feel it. The only concern I have about the monetary value of gold is how it prevents me from getting any. It just looks so dang nice . . . and warm . . . like it ought to be good to eat. I think this is a sign of dragon blood somewhere in the ancestry.
From the responses on this thread it would seem that gold advocacy is not a poular topic on this site. That is unfortunate.
Gold has been money for thousands of years. The Krugerrand minted in 1978 looks the same today as it will a hundred years from now. Not sure you can say the same thing about the ten dollar bill.
It will probably have about the same purchasing power then also. Not sure the new ten dollar bill can make the same claim.
Guess we will find out soon enough.
HG
Statement of fact is not an argument.
Examination of the use of gold throughout history easily will verify the truth of the wear on gold coins. There were also the deliberate methods of clipping, washing and otherwise diminishing the gold content of coins.
Sorry if the truth bothers you.
Gold-backed notes must be convertible into gold or it is not gold-backed. Then there are the hoarders who will keep all the gold they can.
Gold will never be a monetary instrument again.
The real expansion has been coincident with fiat money and is not a result of that fiat money. Paper money is fine and certainly more convenient than carrying gold about and electronic money has largely replaced paper money in volume, at least. So long as the price level remains stable expansion will occur in a free market.In periods of inflation and deflation real expansion is retarded. Fixing money to gold is simply the easiest and surest way to maintain a stable price level, one that does not tempt politicians to fiddle with it so much and screw things up. Politicians look at the results of inflation and cry out Expansion! we've given you expansion! because of the rising prices of everything even as there is no real expansion and perhaps some contraction because of the increasingly inefficient allocation of capital that occurs in an inflation.
Inflation, in the modern world possible only with fiat money, is also a sly way to reduce wages because wages are the last price to rise in an inflation, but rise in tandem with a real expansion.
The reality is that gold jewelry is not "withdrawn" from the system but is part of it, just as much as that double eagle.
As inflation increases and savings shrink because the dollars that comprise savings lose value, jewelry begins to be converted back into bullion. Jewelry, especially gold and diamonds are subconsciously, sometimes explicitly, bought in part as a store of wealth.
You cannot separate out one price from prices in general kust because it looks like a solid asset. Housing prices reflect a flight into solid assets which, just like a flight into gold, is a result of actual inflation. People put their money in an asset that they think will preserve value. The only economic difference between housing and oil is oil is more volatile.
Once again the cure is worse than the disease. The price level will not remain stable under Gold. History shows chronic deflation the problem. There was always a mad search for more metal in order not to succumb to deflation. Deflation is a sure way to drop economic growth and deflation is unavoidable under the gold standard. Scarcity of money was always the cry in the past by the lower classes.
Social unrest is not something that can be just laughed off but is as certain as a democratic lie. No nation not willing to go under arms against its own people can afford the gold standard because of the negative economic forces associated with it. You think we have class warfare now you ain't seen nothing.
There is not enough gold and no scientific means of contolling its withdrawals from the money supply. It is far more arbitrary than politicians. In the past few people could afford to hoard or possess gold today we wear chucks of it on our necks. Whereas jewelry of cost was something the Nobility had today the street sweeper.
Your fear of representative government's ability to control the money supply through its elected and their instruments is another feature of your argument which is unwarranted at least for now. But the existence of the gold standard is absolutely no guarantee against tyranny.
Such processes are not as smooth and appropriate as theory indicates and has high transaction costs which limit their effectiveness. Classical economics had a consistent and exhaustive theory that predicted events but turned out not to do so.
But their is no way I would agree to linking the United States money supply to the decisions of gold speculators, third world political vagaries, financial decisions of other governments or the desire of Rap stars, Chinese and Indians for blinge.
Check your charts. Every deflation is characterized by a decrease in the nominal price of gold.In the past when governments inflated they "clipped" the coinage and the effect was direct. There was less gold per monetary unit in the coin and the coind\s traded at the value of the gold content, not at the nominal rate for the coins and the nominal price of gold went up. Deflation happened when the rulers returned to "honest" money, i.e. raisd gold content to its previous level in the new coins.
In the modern world actual gold voinage is not necessary. The marked mechanism is used to maintain the value of the unig\t of currency vis a vs gold. Modern government economists claim they are using a more rational "basket of goods" but the reality of it is that inflation is exactly mirrored in the price of gold taken from a moving average. Whatever governments and faux economists say about it and try to do about it these things remain true and if ignored the results are predictible but not by them.
Check your charts. Every deflation is characterized by a decrease in the nominal price of gold.In the past when governments inflated they "clipped" the coinage and the effect was direct. There was less gold per monetary unit in the coin and the coind\s traded at the value of the gold content, not at the nominal rate for the coins and the nominal price of gold went up. Deflation happened when the rulers returned to "honest" money, i.e. raisd gold content to its previous level in the new coins.
In the modern world actual gold coinage is not necessary. The market mechanism is used to maintain the value of the unit of currency vis a vs gold. Modern government economists claim they are using a more rational "basket of goods" but the reality of it is that inflation is exactly mirrored in the price of gold taken from a moving average. Whatever governments and faux economists say about it and try to do about it these things remain true and if ignored the results are predictible but not by them.
The actual value of gold is NOT determined by any government but by all the actors in the market and tends to remain constant. That's why government fiddling never attains the results desired.Government does not control value or the whole population of the world's perception of value and could not even with World Government.
Reasoned discussion is beyond your ken and mete. "Above your pay grade", to use that despicable Joe Biden's phrase. (He probably plagarized it from somewhere, anyway.)
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