Understanding GOLD

Gold may be valuable to store – but gold is not a store of value. Gold does have intrinsic properties that make it valuable – but gold does not have intrinsic value.

There is no fixed measure of value.

There are standards for gold, but gold is not (always) the standard – especially by which value is measured.

Economic value is subjective. It is imputed. Buyers compete against buyers; sellers compete against sellers; and people’s assessments of future conditions are always changing.

The price of goods and services rise and fall in terms of changes in the markets, which include consumers’ tastes, monetary changes, changes in supply, changes in the price of alternatives, and changes in the public’s expectations of future prices.

These changes drive prices up or down. People have subjective assessments of an “objective” future. They also have expectations regarding other people’s subjective assessments of the future. Through competitive bidding, people establish objective prices in various markets.

So-called “objective” prices are the result of competitive bids by people with subjective (immediate and more distant) assessments of the future.

Fluctuations in the price of gold indicate that immediate changes in external circumstances can affect the price of gold. There has been an unexpected increase in the demand for gold.

The rising price of gold reflects an anticipation of continuing turmoil in the world.

Individuals impute value. They think something is valuable to them at this moment. This can change, moment to moment. People are constantly changing their assessments of what items or services are worth to them.

Individuals have very different assessments of the future. The average American owns no gold, does not know where to buy gold coins, probably has no awareness that the United States Mint produces bullion gold coins, and surely has no knowledge of the fact that the Mint did not do this until after Ron Paul persuaded President Reagan’s gold commission in 1981 to ask Congress to pass this legislation in 1985. Yet we read about the price of gold in the financial press.

The fact that the average American owns no gold indicates that the average American does not assess the future in the same way that the average gold bug does. The typical buyer of a gold ETF or other gold fund is not thinking the way that the average American does.

Gold is not a standard of value. It moves up or down in terms of individuals’ competing assessment of its prospects in a world of fiat money. The general public thinks of their national currency unit as a standard of value, but it isn’t. That is not because fiat money is uniquely a fiat economic standard. All standards are fiat.

We say “let it be,” and then either buy, sell, or do nothing. It is the composite bids of those people who actually buy and sell that establish the price of any asset. There is no earthly source of composite value. There are only objective bids.

Physical measures of the weight and fineness of a gold coin do exist. These measures establish the degree to which a coin deviates from this standard. They enable us to determine whether a coin is a counterfeit. But they do not tell us what gold is worth. Only the free market does that.

Gold possesses intrinsic physical qualities. It is extremely durable. It is malleable. It has a certain luster. All of this in combination has made gold a popular investment tool down through the ages. But there is no intrinsic value to gold. Value is not intrinsic. It is imputed.

Over centuries, an ounce of gold has bought varying quantities of goods and services of varying value.

There is great confusion regarding the value of gold through time, not because gold has changed but because everything else has. What makes gold unique is this: a person can buy something of considerable value with an ounce of gold. There is a market for gold all over the world. There is no market for the things gold would have bought 50 years ago, except as items for the “Antiques Road Show.”

This is gold’s great benefit: its continuity of value over time. People will still impute value to gold in another century. There are very few investment assets that will surely maintain a comparable value over the same time period.

Every line of mass production gets better over time except gold. Yet gold, by not changing at all, maintains value through time.

Do not confuse this with intrinsic value. Understand it in terms of intrinsic physical qualities. Gold’s most important attribute is its high imputed value in relation to its weight. It is expensive to mine.

It is not that people can get rich with gold. It is that they are less likely to get poor.

The stability of gold’s value through time is in contrast with the stability of government promises, especially concerning the stability of the national currency unit.

Politicians lie. Gold muddles through. Central bankers make grandiose promises. Gold muddles through. Economists make grand claims about the ability of economic forecasting tools to bring stability to the economy. Gold muddles through.

The business cycle makes and breaks investment plans. Gold muddles through. The structure of personal and corporate debt changes over time, bringing to ruin people’s plans. Gold muddles through.

Employers hope for success in terms of their plans for the future. When those plans hit the brick wall of uncertainty, the plans may die. Gold muddles through.

The typical father in India buys gold for his daughter’s dowry, just as his father did, and his grandfather did, stretching back through time to before the Bank of England. A gold necklace worn by some lovely young bride in 1500 will look just as good on a bride today.

Think of a bride wearing Federal Reserve Notes. This image just doesn’t have the same sense of permanence.

The simple farmer in India may not be able to read, but he will buy gold for his daughter in confidence that a piece of gold is worth more than all the collected assurances of stability issued by all of the Federal Reserve Chairman.

The Western investor trusts the promises of politicians, who he knows lie for a living. He trusts the assurances of a Federal Reserve Board Chairman, when he knows that the same man did not see the crash of 2008-9 coming.

Who shows greater wisdom: the simple farmer in India or the hot-shot money manager on Wall Street?

Gold is not for hot-shot investors. It is for simple people who know enough not to trust the promises of politicians and the assurances of Federal Reserve Board Chairmen.

Gold is a lasting testimony to the lies of politicians. They stand in front of the cameras and tell the voters that things will be just fine one of these days. Real soon now. The voters dream of golden years in retirement.

Congress is Lucy. The voters are Charlie Brown. The Social Security system is a football. We know what is going to happen. Charlie knows what is going to happen. It will happen.

Gold is for the skeptical investor who says, “She’s going to pull the ball away. I will not kick it.” He sits on the sidelines, amused at the gullibility of Charlie, year after year.

Gold is a valuable thing to store. Don’t pay attention to a self-educated gold promoter who tells you that gold is a store of value or has intrinsic value.

Understand the logic of gold before you buy it. The logic of gold is that, fifty years from now, someone will buy that gold with something of value.

Ben Bernanke does not believe this. That’s another reason to buy gold.

An even better buy than gold, however, is SILVER!

© 2011, Oren Pardes. All rights reserved.

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