What does Gold have that the Dollar doesn’t?
Friday, April 18th, 2008Gold is currently being traded at about 914 USD/oz. That’s down about 89 USD (8.9%) from mid March, but up 33% over 6 months and up 203% over 5 years.
Why? What is it about gold that makes it a valuable investment in 2008, AD? Why are people continuing to argue for gold-backed currencies? Why are online companies creating something as arcane as Digital Gold Currencies? Isn’t that the same as re-introducing tally sticks or wampums?
Although I personally think a wampum based economy would be really cool, there is a big difference between a shell bead and gold; There’s real value in gold, not only as currency.
Each and every major currency you can think of today has zero gold backing. They are fiat currencies created and maintained by central banks, sometimes with extraordinary power over the economies they serve. Just look at the US Federal Reserve System, they’ve even stopped reporting the M3 to Congress, which basically means no-one really knows how many US dollars are being printed, which in turn means no-one can accurately predict inflation (except of course the Fed).
The world of fiat money is fascinating and vaguely resembling magic - when it works. After all, value is construed out of virtually nothing but the general faith in the institutions backing the money. It’s basically money because someone says it is. So were tally sticks, and wampums. So could Amazon Horned Frogs be - well, that would be a pretty slimy economy, but we would be in touch with nature again, and the rainforests wouldn’t be levelled due to logging.
Anyhow, regardless of if we carry around paper, sticks, shells or 20 cm long amphibians to buy stuff with, the truth is that the second we stop believing the institutions issuing this fiat money are willing or able to back the value of their money, there is NO basic intrinsic value in them, except of course you could blow your nose with a dollar bill. Cool - and scary.
Gold, on the other hand, has very real value. When Hans F. Sennholz wrote Why Gold? back in 2003, gold was traded at 350-360 USD/oz. I don’t know if professor Sennholz predicted gold to reach 1000 USD/oz five years from then, but it did. In the article, he explains why although gold production output might fluctuate year over year (e.g. new mining technology becoming economically viable as prices soar, my note) the amount of gold in circulation - in jewelry, electronics, stored as bullions, in teeth fillings, etc, etc, is so vast, that the total supply is for all practical purposes virtually static by now.
So, gold is there. Supply is stable. It stores well. Maybe DGCs make a whole lot of sense? I think additional actors might join in, notably companies like BullionVault that offers bullion trading today, but haven’t yet turned the customer gold into the foundation of a payment solution.