2008: The year gold goes mainstream?December 28, 2007
Those of us who invest in gold may already consider it to be mainstream, but if you ask most casual investors, more likely than not, they have never really considered buying gold. They may not even know it’s a serious option. For them, perhaps the ubiquitous cartoon image of a bag and big black printed dollar sign comes to mind. But now that ETF’s are beginning to enter the language of typical mutual fund investors, gold bullion has become more accessible than ever.
Perhaps this isn’t good news for shares of gold mining companies, but a more valuable commodity should help their bottom lines nonetheless. If you adjust for inflation, in today’s dollars the all time high price of gold is about $2000 per ounce and today we closed just above $830. This has many gold bugs quite excited about the prospect of expected further weakness in the US currency and what it could hold for their favorite precious metal. On the other hand, there are some currency speculators predicting a potential end to the US dollar bear market. However, this article doesn’t indicate whether the “strategists” (economists?) surveyed expect 2008 gains versus the Euro to hold passed next year. Many infamous advocates of gold, such as Marc Faber, have advised investors to expect a slight correction in the price of gold as a temporary US dollar recovery likely looms on the horizon. In my opinion, the disastrous housing market will make it very difficult for the Federal Reserve to boost interest rates in any significant way next year. With a slowing economy and rate gaps widening between the US and many foreign countries, especially China, I don’t see any reason to expect any temporary increase in the US dollar to be sustained beyond a few quarters. The biggest risk with gold is market manipulation, but if demand spreads to the common folk even that may not matter. Classic Marc Faber interview on Bloomberg from September, before the 50 basis point cut
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I’m already using digital gold currency everyday and my account at GoldMoney.com moves up and down with the price. When the dollar falls, I’m not hurt. ETF’s are great, I prefer the real thing and buy find it in DGC. Digital Gold has a magazine out now. DGCmagazine
Mark
If you want to protect yourself against the falling dollar, you can buy foreign currencies and stocks, or american companies that export more than they import. Gold is just one financial product among others.
Gold has no value unless someone assures redemption
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Gold does not have any intrinsic value it is only a token so it cannot be used as money/currency unless someone assures redemption in terms of food/fuel essential energy sources for human survival.
The only stuff that can be used as money/currency without redemption obligation by the issuer is food grains because it has intrinsic energy essential for human survival and does not require one more exchange to realize value.
Food has intrinsic value, but it’s not an effective way to exchange goods because it rots, it’s difficult to measure, it’s difficult to transport, and its supply can not be assured to be stable. Gold has intrinsic value as money precisely because it solves all those problems… and people think it’s pretty. How many people wear grains on their necklaces? It will always be accepted as money, that’s kinda the point.
@point
“Food has intrinsic value, but it’s not an effective way to exchange goods because it rots”
Exactly! food grains as money is inflation proof.
“it’s difficult to measure”
No, common food grains like wheat, rice, corn can be easily measured both in weight and volume accurately. The quality can be easily ascertained by ordinary people. Where as how many people can differentiate 18,19,20,21,22 carat gold?
“it’s difficult to transport”
No, food grain backed paper currency can be used exactly like gold backed paper currency. Since the food grain storage period is limited to about 2 years, constant redemption is must for food grain backed currency and checks against inflation and market manipulation.
“its supply can not be assured to be stable”
Without stable supply of food we are all dead! Stable food supply is essential for human survival. where as gold is absolutely not required for human survival so has no value for a hungry person.
“Gold has intrinsic value as money precisely because it solves all those problems”
Gold does not have any intrinsic value and needs one more exchange to realize value, so no assured value is possible. In fact value of gold propaganda is one of greatest socio-economic frauds in history!
“How many people wear grains on their necklaces?”
How many days can a person wearing gold necklaces survive without food…..?
General Public,
I’m not arguing about whether food has value, I invest in agricultural commodities, I just don’t think it’s good as money. There’s a difference.
Rotting food in a warehouse is not a good store of value. Is 18 month old grain worth more than 6 month old grain?
Gold is much easier to count because it’s minted. Everybody knows how much gold is in each coin or bar. Fraud can be an issue if you’re not trading certificates from a reliable source, but that can also be the case for food. I don’t know the difference between the different types of grains, I’m not going to taste 1 out of every 100 grains to make sure they aren’t piles of plastic. Let’s get real here.
Food supplies are not stable precisely for that reason! We eat it, anybody can grow it in their backyard, it’s subject to weather conditions and droughts, etc. Nobody consumes gold, almost all the gold that has ever been mined is still above the earth. You don’t want your money supply to be easily manipulated, but you do want it at least to exist in reasonable quantities and be chemically stable, otherwise what’s the point? We might as well just return to a barter society.
Gold does have intrinsic value because people want it, who cares why. Using your logic we would be better off trading fresh water as money… now there’s an idea.
A few more things to consider…
People should be able to be their own banker if they want to. It’s not difficult for people to store away large amounts of gold in their own possession. Do you realize how much grain it would take to buy a house? How many people can put a grain elevator in their spare bedroom? What do they do if their house burns down or gets flooded? Grain as money would require huge centralized institutions to store the food — the potential for abuse would be enormous. It would be a fascists dream, almost as bad as our current system.
And regardless, the last thing we need as a species is for people to start hoarding food until it rots… there is no sense in that. Let people eat and use something else for money.
@point
“Rotting food in a warehouse is not a good store of value.”
Food grains has intrinsic “energy” content essential for sustaining life and hence assured value. Gold does not have any energy content so there is “no assured value” unless someone else is ready to exchange it for something that has energy content, so it is a “token” and it cannot be used as store of value unless someone assures “redemption” against food/fuel/energy, in the absence of such “assured value” market manipulation is easy, exactly same as fiat paper currency, this is a well known fact of history ever since people started using gold coins as money/currency. This creates aggregation of wealth in the hands of market manipulators and eventually leads to social unrest and war.
Recent Iraq war has exposed the fact that US Dollar is backed by oil a fuel. To act as store of value “tokens” like gold has to be backed by food/fuel/energy and someone has to assure “redemption” in absence of such “assurance of value” it cannot act as store of value.
That’s simply false, read my previous comments again. You keep returning to this gold has no value nonsense and it’s just not true. People don’t make gold plated stuff so they can exchange them for food — the gold adornment is the final product. People don’t buy diamonds because they taste good, they’re not even that rare anymore, energy is irrelevant. Gold has value because it’s in demand for decorations and jewelry, and that would be true even if it grew on trees. Once your hunger is satisfied people have other demands — and as long as women exist, shiny, sparkly jewels and precious metals will always be on that list, as pointless as that may seem to you. People have been dressing up for as long as there have been people.
And gold is nothing like a fiat currency. What makes fiat currencies fail is the lack of discipline caused by the ability to expand the money supply at will. Alchemists tried for centuries to create gold in a lab and never succeeded. Gold has a limited and relatively constant expanding supply, food on the other hand can be grown very easily. And I can’t stress this enough, money should be chemically stable. The fact that food and paper can be easily defaced with water, fire and bacteria make it less useful as a permanent store of value than a metal. It’s almost guaranteed that every dollar that is produced will eventually end up back a bank because the paper itself has a limited useful lifespan. That’s a bad thing. That’s what facilitates manipulation and centralized power. Gold on the other hand can last for centuries or more. Food is more like fiat currency than gold.
Yes, grain has energy, but the energy is not constant over time. I don’t know why I keep having to repeat myself, food rots! You said the grain has a 2 year life span — does it go from 100% value to 0% value overnight? Who determines when it has officially expired? What if there is a GM grain that lasts 10 times longer is it worth 10 times as much? What if the demand for GM grains depended on the the supply of non GM grains? I couldn’t imagine all my money depreciating from full value to nothing in just 2 years, even fiat dollars hold value better than that. Isn’t a depreciating currency the exact cause of inflation, how exactly is that inflation proof?
If you were going to use food as money you would need complicated DNA analysis to determine the type of each individual grain and how long it has until it expires and I wouldn’t be surprised if each individual grain depreciated over time at a unique rate, maybe the rate isn’t even constant, maybe there is a unique equation to graph the depreciation of each grain. You won’t be able to buy your groceries without a super computer, lol. Imagine what the receipt will look like.
Give it up, it’s just not practical.
I agree with everything you say as far as gold is considered a commodity, but totally disagree when using gold as money/currency or medium of exchange. There is vast difference between the two, in fact what i said earlier about the “value” of gold propaganda as one of the greatest socio-economic frauds is because economic text books does not explain this difference, especially the Austrian economics text books.
Let me illustrate possibility of market manipulation when gold is used as money/currency without redemption obligation:
Let us suppose a village using “rice” as currency one fine day a Banker comes with 100 gold coins and tellls the villagers all the stuff you explained like gold does not rust, it can be used as jewelry, gold as store of value etc… the usual hype. They do bit of haggling and the farmers agree to exchange 10 sacks of rice against 1 gold coin, initially like you mentioned above, the farmers wives were very excited to wear shiny new gold coins on a thread as necklaces. Within a few days the Banker has 1000 sacks of rice and villagers has 100 gold coins and every one is happy for some time. But soon the villagers start running out of rice and approach the Banker to buy back rice in exchange of gold coins. Since the banker has no redemption obligation, he knows the next rice harvest is few months away and the farmers cannot live more than 3-4 days without rice, so the greedy Banker says he will only give 7 sacks of rice against 1 gold coin. Within the next month the Banker has all the 100 gold coins back and has 300 sacks of rice, the market manipulation is obvious isn’t it?
Let us analyze the above story to find were the farmers went wrong in the above transactions. The farmers lost out because they did not “negotiate” a redemption obligation by the issuer of gold coins, the Banker. The above illustration absolutely proves that gold cannot be used as currency without “redemption” obligation in terms of “something” that will sustain life. This “something” that sustains life is “food” and “fuel” that can be used to produce more food.
For using any “token” as medium of exchange redemption obligation in terms of food/fuel/energy is essential. Today US paper dollars has exchange value only because the oil producing nations are accepting it, the moment they stop accepting it in exchange of oil dollar has no value. The real “funny” thing is Federal reserve bank does not have any oil reserves the fuel with intrinsic energy content that gives exchange value to dollars.
Like the farmers in the above story whole lot of “economists” do not understand possibility market manipulation when gold or any token(a commodity that does not have intrinsic energy content) or fiat currency is used as “medium of exchange” without redemption obligation.
I appreciate your position, but I simply disagree.
In your analogy you chose to make the banker savvy and the farmer naive, there is no reason that couldn’t be reversed. There is no reason the farmer had to sell all his rice to the point he had none, maybe the banker could have sold all his gold until he had none, and would have to beg the farmer for gold to buy clean water and electricity from someone else. Using your analogy there would be nothing preventing the farmer from rationing his life-giving rice and waiting until the banker and everyone else are about to die of starvation then sell it for 100 times more in the very first transaction.
The reason your analogy is flawed is because it assumes the banker has a monopoly on gold and the farmer has a monopoly on food. Obviously in that case it doesn’t make a difference what currency you use, you will have the risk of abuse. That has nothing to do with gold in the slightest.
In the real world there is competition, and if you can’t get what you want from one supplier you go to the next. Unless you are a farmer, blacksmith, carpenter, mechanic and every other kind of discipline at once, you will always need to trade whatever you make for whatever others make. If that commerce stops you will have starvation and suffering no matter what currency you use.
@point
“If you were going to use food as money you would need complicated DNA analysis to determine the type of each individual grain and how long it has until it expires and I wouldn’t be surprised if each individual grain depreciated over time at a unique rate, maybe the rate isn’t even constant, maybe there is a unique equation to graph the depreciation of each grain. You won’t be able to buy your groceries without a super computer, lol. Imagine what the receipt will look like.”
All this circus is not required, food grains has been used as currency for 5000+ years in Indian villages, till late 1960’s when Govt forced farmers to switch to paper currency with rice and wheat levy system which pushed paper currency into the hands of farmers. Govt did this because without farmers accepting paper currency, paper currency it did not have any value or value was depreciating fast. After 40+ years of using fiat currency without redemption obligation, the result is http://www.dnaindia.com/report.asp?NewsID=1049554
Exactly, villages. Are you going to extrapolate a village system to the trillion dollar forex market? It’s not practical when you have large fortunes that are being stored for generations. You don’t have that problem in tiny Indian villages.
“Exactly, villages. Are you going to extrapolate a village system to the trillion dollar forex market?”
Why not, a trillion “Kilo Calories” forex market? then no need to keep track of 100’s of elastic fiat currencies that keep changing every day.
Why not? I just wrote 5 pages of why not.
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The problem with gold/silver is that when the chips are down, they are worthless. I heard/read somewhere that after Hurricane Katrina the most important thing you could have to trade/barter with was toilet paper or bottled water. Taking out a pen knife and scratching some gold off a bar won’t get you much. Basically you can’t eat gold…unless its on an expensive dessert. Put another way, I also heard the grandfather (who lived thru the depression) of someone say never forget how to grow things. For years, my father-in-law has about a 1/2 acre hobby garden growing beans, corn, tomatoes, etc and his neighbor has some egg laying chickens (to point above…..live chickens don’t rot). I would think that given three people, one with a garden, one with chickens, and one with a suitcase full of gold, the one with the gold is the one left out.
“Let us suppose a village using “rice” as currency one fine day a Banker comes with 100 gold coins..”
Let’s suppose the entire market is composed of nitwits except for one guy. Then he can take advantage of them!
What a surprise.