Most serious gold investors follow a basic principle: that gold is stable in value. Changes in the “gold price” represent changes in the currency being compared to gold, while gold itself is essentially inert.
This is why gold was used as a monetary foundation for literally thousands of years. You want money to be stable in value. The simplest way to accomplish this was to link it to gold. Today, we summarize this quality by saying that “gold is money.”
From this we can see immediately, that if gold doesn’t change in value – at least not very much – then it can never be in a “bubble.” There may be a time when many people are desperate to trade their paper money for gold, but that is because their paper money is collapsing in value. It has nothing to do with gold.
Let’s take a look at some of the great gold bull markets of the last hundred years:
Each of these situations was an episode of paper currency depreciation. Today is no different. The rising dollar/euro/yen gold price is simply a reflection of the Keynesian “easy money” policies popular around the world today.
We can also see that, if gold remains stable in value, then the supply/demand considerations that affect industrial commodities do not affect gold, which is a monetary commodity. This is why gold is used as money. If its value was affected by industrial supply/demand factors, we would not be able to use it as money.
Thus, “jewelry demand” or “peak gold,” or any other such factor, has little meaningful effect on gold’s value. Day-to-day money flows will affect the price at which currencies trade vs. gold, but this ultimately affects the currency in question, not gold.
None of these historical “gold bull markets” resulted from jewelry demand or mining supply.
Any attempt to attach a valuation to gold is mostly a waste of time. Concepts like the “inflation-adjusted gold price” or the “gold/oil ratio,” or a ratio of outstanding debt or currency to a quantity of gold bullion, are a distraction. An item that doesn’t change value is never cheap or dear. That’s what “gold is money” means.
The “price of gold” may reach five thousand, ten thousand, a hundred thousand, a million, or a billion dollars per ounce. The gold bubble-callers will be frothing at the mouth, until they finally have the realization that there was never a bubble in gold, but only a crash in paper money.
Gold is money. Always has been. Probably always will be. This time it’s different? I don’t think so.
Nathan Lewisfor The Daily Reckoning
Nathan Lewis was formerly the chief international economist of a leading economic forecasting firm. He now works for an asset management company based in New York. Lewis has written for the Financial Times, the Wall Street Journal Asia, the Japan Times, Pravda, and authored Gold: The Once and Future Money.
The bubble is the high number of pundits and experts who don’t understand this basic and simple concept.
Gold can be a bubble, just measure it against other things of value. In December 1980 you could buy a good suit for one ounce of gold.Four weeks later you could get two suits for one ounce of gold. Did suits collapse in value? Today an ounce of gold will buy a good suit.
Measuring value against something as perverted as paper money does not prove it’s stability.
Gold as a store of wealth yes-as a model of stability I don’t think so. Gold is subject to the madness of the markets. Somebody please produce a chart on the Hysterical Supply and Demand for gold.
When soros said gold will be the ultimate bubble, he meant the ultimate as in the last, not the biggest….
Good piece Nathan. I am sure you are a disciple of FOFOA too??
If not, start with the shoeshine boy and it’s the flow stupid…..amazing pieces of writing if you are observing/writing about gold/oil/money etc.
Good article – thought I was reading TGM (The Great Mogambo) for a minute. I am sending the link to several friends. Whee.
The new theory of money which is coming into being is not going to include gold.
You are mistaken. Gold certainly can go up in value just like other things if its demand increases.
This is the most basic of economic principles here.
If with my gold, I can buy more of anything than ever before, then gold certainly would have gone up in value because it would have gone up in buying power relative to everything else which is the only way to measure the value of a thing.
What’s something worth? what someone will pay for it. Nothing more or less.
But paid for in what? You name it. Dollars, cars, bananas…
Using gold as an absolute standard by which to measure everything else is arbitrary. You could just as legitimately decide to use dollars as an absolute standard.
More. Yea thats the mantra of the continual growth crowd. More, More, give me more.
“You could just as legitimately decide to use dollars as an absolute standard.”
Most certainly not. Gold has a few interesting attributes that are not really found elsewhere.
-The ratio of gold above ground to people above ground is more stable than most other ratios’s around.
-Gold ‘used’ in jewellery is fully recyclable. It is not destroyed in use (as silver is in it’s uses). This means gold is relatively static in volume, so it measured against other things mean it’s often the more stable of the two.
-The rarity and current cost of extraction prohibits massive price drops seen in things like diamonds 90 odd years ago. So, you get less supply side fluctuations
Lets be honest, the whole gold for oil story is very compelling and completely explains the relative large imbalance dollar to oz to external value equation. If you measured the oz per X over the history of man, you’ll find gold at a massive discount today. What you are seeing today is a value rebalancing as measured in fiat, which itself is a moving target as it’s inflationary.
You are partially right though. Things are only worth what something actually pays for it. That can affect the valuevalue balance for a short while. So I believe that gold can be priced above what many would value it at, in fact a rising relative price mean today’s buyers value it higher than yesterdays. This is a concept very much at the heart of a bubble.
Bubbles are created when people who don’t know what they are doing start investing in a monkey see, monkey do situation. Thats where overshoot comes from. I believe that gold certainly can go in to a bubble, it’ll just likely be when people start asking to get paid in gold
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