I love gold. I believe it will be $5000 an ounce one day. Clearly that’s not going to be soon.
The credit crisis crash and its following long recession has been a long and fascinating journey and perhaps it is now all over. We are possibly in a new era with a new set of rules and likely a new set of bubbls and crashes ready to meet us.
Meanwhile gold remains Gold, a beautiful metal that has for millennia been the symbol and medium of the transfer of power.
Its not surprising we go mad for Gold. For the length of history gold was the stuff that got you what you wanted and that in general was life itself. It is highly likely that Gold lust has been genetically selected for. Gold is bound up in our souls.
But that doesn’t mean it will be $5000 an ounce.
Many peope, myself included believed that the money printing created by the central banks of the world would cause high inflation. However while there has been significant inflation in parts, for example assets, real inflation has been kept mainly at bay. That is to say, most people haven’t notice inflation, dazzled as they are by shiny trifles from the manufacturing powerhouses of Asia.
The high inflation in essentials like food and education has been masked by cheap imports and as the workers of the developed world have not gone on strike for higher pay, they magic trick of accounting has been very successful.
You simply cant fault the central bankers for navigating the horrendous mess of 2007/2008, those that complain appear not to be able to imagine the economic zombie apocalypse that could have resulted. I for one will swap that for $1 a pack for M&Ms and expensive groceries.
However the dresam of gold and the gold standard won’t go away for many.
The gold bugs dream of a Gold standard and like so many religious myths, the fantasy won’t die.
This month the Swiss held a referendum that strove to make 20% of the central banks assets gold.
This would have been a disaster for Switzerland and luckily the Swiss knew it and voted it down.
There is a reason for a country to hold gold and one reason only. War. You hold Gold, because in war third parties will only take payment in Gpold. Unless you see this as a possibility, there is no reason to hold Gold at all.
Let us look at some myths.
1) Gold is a more stable store of value than paper money.
Gold is and has always been all over the place in terms of value. Paper currencies are far more stable than Gold. For the dollar, euro and yen to move 10% is a huge move and it takes month. Meanwhile gold can do it overnight. Gold is a volatile store of value.
2) A gold standard produces stability.
History is littered with economic crisis created by Gold standards. In the main there is not enough Gold to go around. A gold standard is also variable. Again history is full of tales of debasement. There can be no extraterrestrial money police protecting money from government. As Gold holders in the US found out when FDR confiscated the Gold, you cannot protect yourself from the privations of the king. If he wants it, he takes it.
3) A gold standard avoids debasement.
A lot of people think that gold coins would force government to avoid crazy, dangerous and outright dishonest behavior. If money is all Gold based, then government will have to play straight in its finances. This is untrue. For starters, even in roman times, IOUs formed the back bone of major finance. It wasn’t paper, but tablets and wax may as well be the same.
The original modern bankers of the 16th century were shuttling letters of credit and creating money supply in roughly the same way as bankers do today. You might buy a horse with a Gold coin but the bankers still inflated credit as a multiple of the gold in their vaults. Money is always going to be a book entry, gold backed or otherwise. It is also never going to be the case that you can trust the gold is actually in the vault as Ukraine discovered recently. Gold money and bank runs are synonymous and bank instability is a key driver of financial chaos.
4) Gold is safe.
Gold is the opposite of safe. Stealing gold from the rich and for that matter poor is a narrative that goes back to Mesopotamia. If you don’t bank it, it’s at great risk, if you bank it, its once again paper!
5) There can/will be a return to the gold standard.
There is not enough gold in the world to back the global economy 1/1. The price of Gold would have to be $100,000s of dollars an ounce. Remember if only small change is gold, all of a sudden money is still paper apart from when it is in your pocket. As such to have a gold standard where a government couldn’t just say, “oh our bonds are only half backed by Gold now,” you have to have Gold backing everything. If you tokenize your gold standard you end up back to square one.
If you did back everything with gold at an artificial value, once again you’d be in the land of manipulation. This time however you’d have everyone trying to extract gold to make a huge profit out of its now massively overvalued status.
I say, if you think Gold is cheap, go and buy it. Gold has no right to be money, it is worth what it is worth.
If the wheels come off the new model of “unsustainable” developed world public sector debt, then Gold will be $5000 an ounce. If the new world order is all about socialized economies in a post capitalist reality, then perhaps the public sector will just grow and grow and money lose much of its old fashioned meaning.
In a world where Whatsap, a business utterly intangible by classic standards, can be bought for 300 tons of Gold, let us call it 10% of a year’s production of gold, people need to focus on how that can work, rather than how Gold can take us back 100 years to an economic reality that would feel Lilliputian to us now.