Anti-Gold
Tired of the economics, much less metal, blogging? Sorry 'bout that, but it's what interests me these days . . . that, and the state of my soul, which is poor and lacking in good bloggable script.
I don't stumble across many sensible anti-gold pieces, but I found one last night. If you're a gold bug and you want to hear a sensible contrary view that shows some respect for the ancient days before 1971 (the year we completed our abandonment of the gold standard), here's a piece you might like.
I like it because he grapples with an issue that has long fascinated me: What is money? I think he comes up on the wrong side of the issue. He comes up wrong, I think, because he starts with a bad definition of "fiat currency":
Unlike what Wikipedia says on the subject, the essence of fiat money is not that it is money declared by a government to be legal tender. It need not derive its value from the government demanding it in payment of taxes or insisting it should be accepted within the national jurisdiction in settlement of debt. Instead the defining property of fiat money is that it has no intrinsic value and derives any value it has only from the shared belief by a sufficient number of economic actors that it has that value.
That's simply not the definition of "fiat currency" (from my Penguin Dictionary of Economics: "Currency that is legally declared a valid means of financing transactions"). "Fiat" means a government is essentially manipulating the system by trying to impose, legally and hopefully psychologically, a paper currency as something valuable. It doesn't mean a general consensus that something is valuable.
That's crucial in the writer's distinction because gold depends on the collective unconscious (excuse the Jungian) value that mankind places on gold: a value that goes back 6,000 years. If it's merely the commodity equivalent of paper money (the writer calls gold a "fiat commodity"), he is correct: it has no intrinsic value. But if it's valuable in and of itself, it's not a fiat currency. To determine whether it's valuable in and of itself, you have to look at the subjective value that people place on it. People for thousands of the years have placed a very high subjective value on gold, and they continue to do so. For my part, I invest with history.
The writer thinks it's funny that certain primitive tribes have placed high intrinsic valuable on various rocks and things that have no value. Because a few tribes have done that, he concludes, gold has no ultimate value, either. That's absurd. The tribes are aberrations, not the norm.
And when you look at the history of mankind--from ancient Israel to modern China, from Pericles' Athens to Samurai Japan, from the United States to the Holy Roman Empire--gold has had value. The years from 1971 to 2001 were, historically speaking, the aberration: an aberration in favor of fiat currency. That aberration might be over; that aberration might stay; that aberration might be in flux as we speak. But no matter what, at this juncture of history, it was a blip-on-the-screen aberration that we lived through. Will it re-assert itself and eventually become the historical norm? Perhaps, but I'm not banking on it.
Feel-Good Quote of the Week
"I repeat what I have said in the past: No decent citizen should trust the Federal Reserve for one second. It's very important that everyone own some gold because the government will make the dollar (in the long term) useless." Marc Faber.
Incidentally, are you bummed out that you don't own precious metals? Cheer up, you might. The Merk Hard Currency Fund, for instance, invests in foreign currencies, but its holdings consist 11.7% of gold. A stock fund prospectus I picked up at random last week disclosed that 1.2% of its holdings were in gold stocks, which was totally unexpected given its investment aim. So even if you have no bullion and don't directly own any mining stocks or ETFs, you might have some exposure to the metals through your 401(k)'s mutual funds.
Which leads me to another point: Institutional investors are jumping into gold, which is a sign that we're in the first leg of a bull market. In a bull market, first the big boys jump in, then the rest of us. The rest of us is when the investment really takes off and has bubble potential. Right now, we're either in the first leg of the bull market or just wrapping it up.
