Forget What Gold is "Worth," It's Money

[beauanderos]

Gold Never Has Been (and Never Will Be) in a Bubble
By Nathan Lewis
Binghamton, New York

Most serious gold investors follow a basic principle: that gold is stable in value. Changes in the “gold price” represent changes in the currency being compared to gold, while gold itself is essentially inert.

This is why gold was used as a monetary foundation for literally thousands of years. You want money to be stable in value. The simplest way to accomplish this was to link it to gold. Today, we summarize this quality by saying that “gold is money.”

From this we can see immediately, that if gold doesn’t change in value – at least not very much – then it can never be in a “bubble.” There may be a time when many people are desperate to trade their paper money for gold, but that is because their paper money is collapsing in value. It has nothing to do with gold.

Let’s take a look at some of the great gold bull markets of the last hundred years:

From 1920 to 1923, the price of gold in German marks rose from 160/oz. to 48 trillion/oz.


From 1945 to 1950, the price of gold in Japanese yen rose from 140/oz. to 12,600/oz.


From 1948 to 1967, the price of gold in Brazilian cruzeiros went from 648/oz. to 94,500/oz.


From 1970 to 1980, the price of gold in US dollars went from 35/oz. to 850/oz.


From 1982 to 1990, the price of gold in Mexican pesos went from 8,000/oz. to 1,025,000/oz.


From 1989 to 2000, the price of gold in Russian rubles went from 1,600/oz. to 8,120,000/oz.
Each of these situations was an episode of paper currency depreciation. Today is no different. The rising dollar/euro/yen gold price is simply a reflection of the Keynesian “easy money” policies popular around the world today.

We can also see that, if gold remains stable in value, then the supply/demand considerations that affect industrial commodities do not affect gold, which is a monetary commodity. This is why gold is used as money. If its value was affected by industrial supply/demand factors, we would not be able to use it as money.

Thus, “jewelry demand” or “peak gold,” or any other such factor, has little meaningful effect on gold’s value. Day-to-day money flows will affect the price at which currencies trade vs. gold, but this ultimately affects the currency in question, not gold.

None of these historical “gold bull markets” resulted from jewelry demand or mining supply.

Any attempt to attach a valuation to gold is mostly a waste of time. Concepts like the “inflation-adjusted gold price” or the “gold/oil ratio,” or a ratio of outstanding debt or currency to a quantity of gold bullion, are a distraction. An item that doesn’t change value is never cheap or dear. That’s what “gold is money” means.

The “price of gold” may reach five thousand, ten thousand, a hundred thousand, a million, or a billion dollars per ounce. The gold bubble-callers will be frothing at the mouth, until they finally have the realization that there was never a bubble in gold, but only a crash in paper money.

Gold is money. Always has been. Probably always will be. This time it’s different? I don’t think so.

Regards,

Nathan Lewis
for The Daily Reckoning

[Ardent Listener]

"We can also see that, if gold remains stable in value, then the supply/demand considerations that affect industrial commodities do not affect gold, which is a monetary commodity. This is why gold is used as money. If its value was affected by industrial supply/demand factors, we would not be able to use it as money."



How can they say gold is "stable" as a money? In everyone one of those examples the value of gold fell again. You could have bought a lot more gallons of gasoline at $850 gold in 1980 than when it tanked down to $200 a short time later. Gold is still a commodity in a fiat world. It is not really anymore stable than silver, industrial commodity or not.

[coppertone]

I agree that change in the "price" of gold may predominantly be a reflection of change in the value of the currency it is priced in. Perhaps then the "value" of gold should be assessed relative to a basket of essentials (wheat, oil, silver, copper, etc) that are required for our current lifestyles.

[commoncents]

The economic value of gold (and silver, and copper) is not what is stable. Economic value changes according to circumstance. A change in preferences of color of jewelry or a newly developed industrial process that was very useful and required gold would affect the economic value of gold.

What is stable is gold's physical characteristics: mallability, ductility, electrical conductivity, reflectivity, chemical inertness, etc. Also relatively stable is the ratio between the amount of gold above ground and the amount of new production (mining) each year. This is a consequence of geological and chemical limitations. These physical and geological characteristics assure us that governments (or other bad actors) cannot create large quantities of the stuff. Gold held as a store of value is valuable because of it's physical characteristics and it remains valuable because we can only bring up out of the earth a small amount each year relative to all that already exists above ground.

These points may sound like nit-picking, but they are not. Some of the critics of commodity money know enough to detect and pounce on errors such as ascribing an unchanging economic value to any tangibile commodity

[smallchange]

"Don't make me hungry - you wouldn't like me when I'm hungry !", I like your tag
NO ONE will like dealing with hungry people, I think the point is very valid. It will not matter, if things come to that, whether your are hungry or prepared, it will be a total mess for both.

Yes, I agree that fiat is worthless compared to gold. Anything we want to regard as money, must be obtained from real human productivity cost... mining, farming... ANYTHING, at least some type of human productivity. The result of fiat, by disregarding this, is why we are in the situation we are in today.

In regards to gold, all is well... until maybe confiscation might occur AGAIN. I would think, at this point, copper pennies and nickels are safer "investments" for the general population. The public in general, might actually accept, in general, gold confiscation again, and maybe even silver confiscation (these people are all rich anyway might be the thinking). But the general population, in my opinion, would NOT accept stealing from the kids piggy banks, including the pennies and nickels contained within... I think, therefore, that saving pennies & nickels is much safer than either gold or silver, should things start to unwind. This is mostly written for the smaller net worth, average people, who maybe are deciding to buy some small amount of silver or gold... that could maybe save some copper pennies or nickels instead. I honestly have no true idea if I am right or not... just want to state what I think.

[AGgressive Metal]

Gold can change in value if more is produced or more is demanded, etc. If everyone thought gold was money, its value would skyrocket, not just in nominal terms, but real terms. That is what "freegold" is about, partially.

[agtownz]

On a similar note:
http://rambleandrant.wordpress.com/2010 ... -is-trash/

Anything, in fact, has the potential to 'be' money, it just has to be agreed upon. Isn't that a basic principle of economics -- that both parties agree on something in an exchange of goods and/or services?

[AGgressive Metal]

Anything, in fact, has the potential to 'be' money, it just has to be agreed upon. Isn't that a basic principle of economics -- that both parties agree on something in an exchange of goods and/or services?

Very true in theory, but history and experience demonstrate gold to be the best and most likely candidate for this role. I don't predict we will go back to using sea shells or tobacco bales as money.

[AGgressive Metal]

On a similar note:
http://rambleandrant.wordpress.com/2010 ... -is-trash/

"If a man offered to sell me his car for 10 bottle caps, I’d accept the offer. Whether or not the man got a deal, the transaction was made. At that point in time, the buying power of my bottle caps was equivalent to a car. Let us introduce fiat currency into this. Fiat currency, like the bottle caps, has little intrinsic worth. However, the buying power of the fiat currency is unquestioned. I can easily swap back and forth a silver coin and its equivalent value in fiat currency. As with the caps, the buying power of the fiat currency is independent of its intrinsic worth. While I may not expect a fiat currency note to maintain any buying power for an indefinite amount of time, the buying power during the time of a given transaction involving fiat currency is equivalent to whatever was attained in exchange. The buying power of the silver coin works in the same way, but historically, precious metals are more resilient in terms of buying power." (emphasis added)

This is completely correct. It is why Freegold envisions pure fiat being used as a daily exchange medium and gold being used for long-term contracts and for savings. Fiat works insofar as it facilitates day-to-day purchases of goods and services, but is totally inappropriate for use as a savings or long-term lending medium.

[Treetop]

Great points everyone.....

Fiat doesnt HAVE to be a failure. Its just to easy to inflate it though, and print it faster then population rises. If a government respected what it is, it could serve as a great medium for exchange long term. Once you start inflating it, it becomes a speeding cycle apparently. Weve been on this cycle for decades. And it gets faster, and faster.....

truthfully, besides the industrial uses, metals are not much different then fiat money. except they do have industrial uses, are RARE which keeps it valuable, they do not corrode, so can be stored long term, but most importantly I think is they are SHINY!!! i seriously think that has played a major role in precious metals solidarity as a currency. It is valuable because we say it is. We say it is because of the reasons I listed above imo.

[JadeDragon]

Gold has value because we say it has value - and because pretty much everyone in the world agrees it has value. Most people would trade other stuff and services (labor) for Gold. Paper money also has value because people agree it has value. The difference is that people will decide over time that varieties of paper money have less or zero value to them. It is far more unlikely that any group of people will decide gold is worthless, or worth far less to them.