What $1000+ Gold Means To You
September 23, 2009
(This article originally appeared in the Huffington Post on September 23, 2009.)
The dollar price of gold is above $1000 and new all-time highs are likely. Maybe it will go quite a bit higher.
OK, so what? Does this mean that wedding bands get more expensive or something?
Most people probably look at gold as some minor metal — not even in the class of major metals, like copper, aluminum or iron. Maybe you could group it with vanadium, molybdenum and rhodium. It might be good for a little gamble, but it is hardly an investment.
If you look more closely at gold, you discover that there is hardly any compelling investment thesis at all. Molybdenum, for example, is used in steel alloys. Maybe places like India and China will use a lot of steel alloy to build all kinds of things. Since it is not so easy to open a new moly mine, there could be a supply/demand imbalance, driving up the price of moly.
There is never a supply/demand imbalance for gold. About 85% of all the gold ever mined in all of history still exists, as jewelry and stockpiles of bullion. Certainly no shortage of supply. Demand for gold — for genuine industrial purposes, such as electronics — amounts to about 2% of world production per year, and 0.04% of the existing supply, (I consider use in dentistry to be jewelry-like.) Not much demand there either.
In fact, it appears that gold is among the most useless things on the planet.
If something is “going up,” but there is no fundamental reason for its rise, then it appears to be a “bubble.” People are just buying it because … it’s going up. Like tulip bulbs or something. Supposedly, there is a “superstition” that drives people to buy gold during times of economic difficulty. Tulip Bulbs of Doom?
These are the typical litany of excuses offered by people who don’t own gold. These are not the reasons people buy gold. They are, rather, a catalog of confusion from people who don’t understand why other people would own gold.
If you talk to people who actually buy gold — a lot of it — they will tell a completely different story. Their reasons can be summed up in the words of J.P. Morgan many years ago:
“Gold is money. That’s it.”
All right, “gold is money.” What does that mean?
The principal characteristic of ideal money is that it is stable in value. Gold is the closest available approximation of this ideal. In other words, gold is money because it is stable in value.
All serious gold investors will tell you some variation of this basic observation.
This “moneyness” of gold is recognized throughout the world. You could jump out of an airplane and parachute into any major or minor city in the world — from New York to Djibouti, Brazzaville to Chiang Mai — and you would probably land within walking distance of someone who will buy your gold near the world market price.
Thus, gold is the supranational money of mankind, because it is stable in value.
One reason it is stable in value is that it has no significant industrial use — and thus no supply/demand issues that could cause a change in value. Thus, gold’s apparent “uselessness” is a necessary condition for it to be useful as money.
You can think of gold as a currency — just like the dollar, euro or yen. However, unlike those floating, government-manipulated fiat currencies, gold is stable in value.
From this you can understand why all major nations used a gold standard system, for basically the entire history of western capitalism, until 1971.
The “dollar price of gold” is the exchange rate between dollars and gold. The “euro price of gold” is the exchange rate between euros and gold.
When it takes more dollars to buy gold, it doesn’t mean that gold is “going up.” Gold is stable in value. It means that the dollar is going down in value.
If you have dollar commitments, such as bank accounts, loans, bonds, employment contracts, pensions, etc. — or assets denominated in dollars such as equities or property — and the value of the dollar is going down, that means that the real values of all those assets are also going down.
Melting away like ice cream on a hot summer’s day.
When the value of a currency declines, usually all real asset values decline alongside. So, if you just stay even — avoid losing value — that’s pretty good. While the value of gold remains stable, its purchasing power can rise because the value of everything else is falling.
If it takes more and more dollars to buy an ounce of gold, you shouldn’t be surprised if it takes more and more dollars to buy all kinds of things. This is generally known as “inflation.” However, this process is quite slow, and it can take many years — even decades — for prices to fully reflect the decline in currency value. Also, the process can be masked by other processes which might induce falling prices, such as recession and debt liquidation.
Thus, although the dollar declines in value, the decline in purchasing power of the dollar is not immediately evident. This is why people stick with their dollars for years, as they lose 80% or 90% of their value, before they catch on to what’s going on.
It’s possible that the dollar will lose quite a lot of value over the next 4-7 years. This would be evident in a “rising gold price.” At $10,000 per oz. of gold, the dollar would be worth only 10% of its value today. It would take ten times as many dollars to buy an ounce of gold.
That is about the point at which I think most mainstream people will finally wake up to what’s going on. Unfortunately for them, by that point, they’re already dead. It’s too late.
Now do you understand why people own gold?