WHY GOLD
(From "Terror-Proof Your Mind and Money")
"Facts do not cease to exist because they are ignored."
—Aldous Huxley
Hetty Green, a successful investor on Wall Street in the early 20th century, said, "Investing is about buying cheap and selling dear." Gold qualifies for investment consideration today because it is actually, comparatively "cheap" in 2006; because it remains scarce and tough to find and produce; and because financial history suggests that because of numerous, unsustainable financial trends operating today, it will become very "dear" in the next few years.
You've probably been told "gold is some sort of barbarous relic" for most of your adult life…but TRY and keep an open mind when you read the following and subsequent posts. New information will be difficult for most people. (As the "marketing guys" have shown, once someone's mind is made up, it takes dynamite or a chaotic and painful crisis to get them to change it.)
An understanding of gold has been eliminated from America over the last 75 years. Our great grandfathers knew more about gold than most of us do today. I mean, high schools don't teach much of anything about personal finance or investing. College econ courses ignore money almost entirely. And only about 27% of the adult population over age 18 actually graduated from college, and not all college graduates or attendees even took an econ class while they were there. Newspapers and magazines have mocked gold and anything related to "sound money." They mostly want you to spend money on their advertisers' products. TeeVee in America has the same spending bias and has done nothing to provide a balanced view of real money. So, your first baby step in understanding anything about gold is just to ignore all the spin and the lousy programming you've received about gold up until now.
People in Europe, China, Japan, Africa, India Russia, South America, and Australia, etc. don't need to read this. You've had centuries of your governments screwing with the money and have mostly learned these lessons. Your folklore embodies these lessons, your geezers retell these messages, and your people are buying gold today because of that understanding. America hasn't had a real money crisis requiring an understanding of gold since our Civil War over 140 years ago…and we have very short memories anyway. So let's start with some real basics about gold and why this stuff is important.
GOLD IS "MONEY"
So, what is money? Business people and even pointy-headed economics professors say money is: (1) a "medium of exchange" AND (2) a "store of value." In this instance, the eggheaded econ guys actually got it right. Money has to be two things. For example, in the old world of barter, I make spears, you make baskets. If I need a basket, and you need a spear, we trade even up, and we've created a marketplace. But tomorrow, I don't need another basket, and you don't need a another spear. HOWEVER, if I trade one of my homemade spears for this stuff called "money," I can use this very negotiable, everybody-wants-this-money-stuff for something else that I want later, like food or women. (Don't look at me funny, guys. Monkey scientists recently introduced money to a bunch of lab chimps…and the female chimps began accepting these money tokens in return for sex. Who says dumb animals are dumb?) And notice, the medium of exchange substance must HOLD its value in order to be tradable in the future for something else. If the money substance turns into pigeon poop in 6 weeks…it ain't money. So, to move past barter, I must get (1) a tradable something that everybody wants and (2) something that lasts. That's the money "concept."
Traders have used many different tangible substances over the centuries to represent the money concept. Native Americans used crops such as wheat and corn, and also strings of shells which they called wampum. Other cultures have used animals, cotton, fish, and even slaves as money. By fits and starts, weighable amounts of metals - gold (as well as silver and some copper and nickel) - became the most workable monies of various eras. By 500 B.C., traders in Turkey were using gold slug coins with stamped pictures of Turkish politicians on them as money. These coins were of standard weights which made their use in trade easier. Do you notice the weighable, recognizable and standardized properties of gold here? I'm arguing here that the following 7 properties make gold a money…a tangible representation of the two-handed money concept:
1. Gold (and silver metal by inference) does not react with oxygen, therefore it doesn’t rot or rust. If treasure hunters dig up a Spanish galleon that's been underwater for 400 years, the gold coins and jewelry aboard will be unaffected. (They've shown these treasure troves being brought up on deck on fortune hunter TeeVee shows and the gold is indeed pretty much unaffected. It's only slightly tarnished. Silver darkens much more as a reaction to oxygen, as owners of silver candlesticks can attest.) The iron cannonballs and the wood that were underwater for 400 years have oxidized and they've indeed become pigeon poop. Money needs to be sturdy and durable. Gold and silver metals ain't called precious for nothing. They're the hardiest metals on the planet.
2. Gold is alloyable. Gold is malleable and can be mixed with other metals like copper to become less soft as coins rustling around in a pocket. You can make higher percentage (.9999) or lower percentage gold in coins, or 9 to 24 karats in the vocabulary of the jewelry business. You can't add alloys to diamonds or rubies… or to vegetables or animals.
3. Gold is divisible. Gold retains
its virtues even as it's chopped or sliced or diced. You can make lighter or heavier gold coins by weight. Diamonds
and rubies and gemstones can't be divided easily, and when they are, they
become less valuable because they’re smaller. The same is obviously true for animals and vegetables. And who cares if you can divide a barrel of
oil.
4. Gold is recognizable. The color, luster, and density/heaviness and relative softness of gold are properties unique among metals. Gold is easily assayable and can be worked with at relatively low furnace temperatures. People could weigh gold; and they could measure its purity. They learned to trust those easily recognizable and testable qualities.
5. Gold is portable. Portability is a highly desirable quality in a money if you're trading on the road, or fleeing from a natural disaster or from a bad government. Those giant stone money things in the South Pacific didn't work very well on a dugout canoe. Gold is a "bearer instrument" which is both good and bad. People could carry gold around, but then Robin Hood could come and take it away. Gold does have some problems as a money, and one of them is it isn't always convenient…but more on that later.
6. Gold is ductile and can be stretched as a wire or flattened into very thin sheets and still hold all of it's physical properties. One ounce of gold can be pounded into almost 100 square feet of gold leaf, which can then cover a roof or a a piece of furniture to show how rich the state or church or the person displaying it is. In other words, gold money can be displayed and can act as a demonstration of the owner's wealth. Why do you think Saint Peter's Basilica in Rome, Saint Paul's Church in London, along with the California and Colorado (and even Connecticut) State Capital buildings all have gold on their roofs. You've seen pictures of these buildings and been impressed, haven't you? (And then there's the gold tip of the New York Life building in New York that they now show in their TeeVee commercials. They're advertising how rich they are, and how they'll have the dough to pay you off on your life insurance.) Gold has been displayed for literally thousands of years, over 100 generations of our ancestors…it's part of our DNA now to recognize it as valuable. Displayed gold that is displayed on a roof or a piece of furniture or as jewelry is a way of showing others the money.
7. And finally, gold and silver have a high unit value. Precious metals are scarce in the earth's crust, but have been mined for centuries in over 80 countries. Scarcity means a little bit of gold goes a long way. With wide dispersal around the world, many peoples have discovered and used gold. Scarcity and difficulty of extraction mean that gold has a high unit value per ounce. Computer bits are not scarce and they never will be.
As a money, scarcity is efficient. Do the math here: if gold is selling for anything over $533 an ounce, and there are 15 troy ounces in a pound, that means that gold is selling for at least 15 times $533 or $8,000 a pound! Hello? What else do you know of that is selling for a little over half of what it sold for in 1980, and still sells for over $8000 a pound? (This may be why people say something is worth its weight in… gold.) (On the other hand, platinum with an even higher unit value is too scarce and very difficult to work with, and was never used much as a money.
Just to make sure I'm getting this gold-is-money fact situation across, let's compare gold money to paper "money." Paper is NOT scarce. It's being counterfeited by a couple of foreign governments, and on neighborhood copy machines today, and the FEDs are creating it by the truck full. Congress has been raising the national debt limit and shoveling the stuff out of the printing presses for the last 90 years. The new FED guy is threatening to drop dollars from helicopters if we run short. And finally, if you destroy part of a paper dollar, your bank will replace it with another one! No problemo. Does paper "money" sound like something that's scarce and will hold its value?
And please notice that when Uncle Sam's Mint creates zillions of brand new paper dollars…those acts of creation make each of the dollars already in your pocket worth LESS. That's the meaning of inflation - less purchasing power. You can't do that with gold. It's scarce because they ain't finding and producing that much of it each year. Remember, dollars are a currency, not a money.
Ok, I'll try and wrap this up with some summary words to try and overcome the last of your intellectual inertia here. In conclusion, there are physical and chemical properties that made gold a really, really excellent and useful money - the classic medium of exchange AND a store of value.
Post script: this little essay of less than 2000 words took you perhaps 10 minutes - at the most - to read. Doesn't it seem a trifle ODD that nobody from the educational or financial world has managed to mention these 7 little facts about gold as money to you during your entire life? Eh?
The world had a "Gold Standard" for over 200 years. It kept prices steady and produced terrific growth and trade among the world's economies up until 1914 (the beginning of World War I). The Gold Standard meant that anyone could exchange their paper currency for real gold money or visa versa at any bank…and that exchangeability added convenience to the heavy-to-carry-around gold problem. That Gold Standard was pretty much killed in the 1930's, and "they" tell you gold is only a "commodity" now.
My question is, if gold worked so well as a money, and kept people and governments and banks so honest, what happened? Instead of asking why about gold…we should be asking, Why is gold NOT a money today?
To be continued…
March 23, 2006
Goldfingerer
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