A very interesting article. Here's my response to some of the contentions:
The problem with this refrain is 1980–2001. Prices in general doubled, but gold’s price fell from $850 to $257. The only investment worse than gold was silver.
$850 was the absolute speculative peak during a period of serious double-digit inflation. Gold pretty rapidly fell to the $400 and $300 range and stayed there for the next 20 years. What could account for the drop and stagnation over that time period? (1) The public perception (whether or not true) that inflation was under control between 1980-2001, in the 2 or 3% range. After all, the gold supply itself is also increasing at around 2% a year due to new mining... so if there's very little inflation, there's no cause for gold to increase. (2) Sales of gold by central banks or other major holders, which can increase the available market supply substantially and depress prices. This occurred particularly in the late 1990s and pushed the price down into the $200s.
Unfortunately, today’s market price of gold is subjectively influenced by fewer and fewer buyers remembering gold was once money and a belief it will soon become money again. With the passing of time such gold buyers will surely decline further.
I don't think gold's price depends on people thinking of it as "money." People think of it being innately valuable. Like diamonds or silver or some such. There is a public perception that gold has innate worth. Expensive jewelry is made of it; we have the image of Fort Knox as the ultimate store of wealth; stories in the news of billionaires in other countries making toiler seats or some such out of gold; etc. etc.
Gold will do well in a time of price inflation at the double-digit level, but for now, it is subject to the same forces as any other commodity. It is subject to the business cycle.
This is an excellent point. Gold did particularly well in the late 1970s, when we had double-digit inflation, and earlier this year, when the CPI was again measuring high inflation (though not double digit) and the press was full of stories of gas prices, milk prices, egg prices, etc. going through the roof. Gold will have its day again, but not until we see (and the public perceives) real substantial, probably double digit inflation returning.
"Men who had never shown any ability to make or increase fortunes for themselves abounded in brilliant plans for creating and increasing wealth for the country at large." Fiat Money Inflation in France, Andrew Dickson White (1912)
I think the article is a bit incomplete and one-sided. Time ranges were conveniently chosen.
For example, I had heard, and it sounded reasonable, that an average house in the 20's would cost around 200 $20 gold pieces, or $4000. Today, if you had 200 gold pieces, you could buy an average house (approx $150k). That is a good example of how gold has retained it's buying power. Sure, you can pick other time periods and make a case one way or another to make a point about how good or bad gold is, but I think my example is reasonable.
The article is a bit old, but he also discounts the possibility of returning to a gold standard for currency. I know that the US government would never willingly accept such a concept, but there's a Bretton Woods conference going on now or in the next few days where they'll be discussing just that.
Normally, massive dollar creation would raise the price of gold, so normally gold would be an excellent inflation hedge, as in the '70s.
Normally, a deflationary spiral would decrease the number of dollars in circulation so that a dollar would indeed buy more gold. But gold wouldn't necessarily be a bad hedge because it would retain some edge over other types of assets due to its monetary history.
The current situation is abnormal, so I don't know what the economy is experiencing now or how gold ought to be acting. I guess you could consider it a deflationary blowoff of bogus credit derivatives that is simultaneously being used to justify raising taxes on the public in order to support lavish lifestyles for wealthy bankers who have gone through mega-tons of money already and now need more. Or something like that.
But I don't know how that should affect gold, unless the whole thing blows up, and that scenario automatically defaults to the firearms & food economy, with gold in a subordinate role.
If the world economy doesn't blow up, then gold would probably retain some value as a tradeable commodity, as it has for the past 3 decades.
Q: Are You Printing Money? Bernanke: Not Literally
You are correct in that it's hard for anyone to know how gold "should" be acting right now... I don't think we've been in quite a situation like this before. But there are a few historical facts that are applicable.
No fiat currency has ever survived very long.
Periods of great economic turmoil usually result in war.
Comments
The problem with this refrain is 1980–2001. Prices in general doubled, but gold’s price fell from $850 to $257. The only investment worse than gold was silver.
$850 was the absolute speculative peak during a period of serious double-digit inflation. Gold pretty rapidly fell to the $400 and $300 range and stayed there for the next 20 years. What could account for the drop and stagnation over that time period? (1) The public perception (whether or not true) that inflation was under control between 1980-2001, in the 2 or 3% range. After all, the gold supply itself is also increasing at around 2% a year due to new mining... so if there's very little inflation, there's no cause for gold to increase. (2) Sales of gold by central banks or other major holders, which can increase the available market supply substantially and depress prices. This occurred particularly in the late 1990s and pushed the price down into the $200s.
Unfortunately, today’s market price of gold is subjectively influenced by fewer and fewer buyers remembering gold was once money and a belief it will soon become money again. With the passing of time such gold buyers will surely decline further.
I don't think gold's price depends on people thinking of it as "money." People think of it being innately valuable. Like diamonds or silver or some such. There is a public perception that gold has innate worth. Expensive jewelry is made of it; we have the image of Fort Knox as the ultimate store of wealth; stories in the news of billionaires in other countries making toiler seats or some such out of gold; etc. etc.
Gold will do well in a time of price inflation at the double-digit level, but for now, it is subject to the same forces as any other commodity. It is subject to the business cycle.
This is an excellent point. Gold did particularly well in the late 1970s, when we had double-digit inflation, and earlier this year, when the CPI was again measuring high inflation (though not double digit) and the press was full of stories of gas prices, milk prices, egg prices, etc. going through the roof. Gold will have its day again, but not until we see (and the public perceives) real substantial, probably double digit inflation returning.
For example, I had heard, and it sounded reasonable, that an average house in the 20's would cost around 200 $20 gold pieces, or $4000. Today, if you had 200 gold pieces, you could buy an average house (approx $150k). That is a good example of how gold has retained it's buying power. Sure, you can pick other time periods and make a case one way or another to make a point about how good or bad gold is, but I think my example is reasonable.
The article is a bit old, but he also discounts the possibility of returning to a gold standard for currency. I know that the US government would never willingly accept such a concept, but there's a Bretton Woods conference going on now or in the next few days where they'll be discussing just that.
The guy missed the ride from $640 to $1,004
We will never go back to a Gold Standard, the FED has all the Paper Power to run over anyone sugesting it.
A Gold Standard without Silver included has always been the absolute worst policy for the common man.
Normally, a deflationary spiral would decrease the number of dollars in circulation so that a dollar would indeed buy more gold. But gold wouldn't necessarily be a bad hedge because it would retain some edge over other types of assets due to its monetary history.
The current situation is abnormal, so I don't know what the economy is experiencing now or how gold ought to be acting. I guess you could consider it a deflationary blowoff of bogus credit derivatives that is simultaneously being used to justify raising taxes on the public in order to support lavish lifestyles for wealthy bankers who have gone through mega-tons of money already and now need more. Or something like that.
But I don't know how that should affect gold, unless the whole thing blows up, and that scenario automatically defaults to the firearms & food economy, with gold in a subordinate role.
If the world economy doesn't blow up, then gold would probably retain some value as a tradeable commodity, as it has for the past 3 decades.
I knew it would happen.
No fiat currency has ever survived very long.
Periods of great economic turmoil usually result in war.
Gold will never decline to $0.