The ERJ position on Gold
The attributes of money are:
- A durable store of purchasing power
- Infinite and linear divisibility
- Scalable
- Compact and transportable
- Universally accepted at "par value"
As yet, the single, perfect form of money has not been found. Every form has some impediment.
Every form of fiat money seems doomed to dilution and rapid loss of durable-store-of-buying-power at some point.
Diamonds are not linearly divisible. Cutting a one-carat diamond in two halves reduces the aggregate value by 90%. Cutting a race-horse in half decreases its value even more.
Collectables rapidly lose value when the supply is expanded.
Silver weighs 3 pounds for every thousand dollars and that adds up.
Precious metals and gems are easy to counterfeit and assaying value adds time and cost to transactions.
A major issue with gold is that it is not scalable to a level that will sustain world trade. There is just not enough gold and far too much trade.
The work around is to increase gold's "velocity" or how quickly it can change hands. A small amount of currency can lubricate a large amount of commerce as long as it is not buried in a hole and forgotten. That is a perspective that is never preached from the pulpit when the readings are about the stewards who invest their five and three talent grub-stakes and the one steward who buried his single talent.
In a low-trust world, every bar of gold must be assayed for purity to ascertain its value. That takes time. If paper money is issued based on (reputed) gold assets to increase the velocity, then it is still just a promise printed on a scrap of paper and it is vulnerable to the same dilution that will occur to fiat money. A "virtual" claim on a bar of gold is even more vulnerable to vaporizing.
Promises
The ultimate currency is our value as a human as demonstrated by our history of keeping promises. If we keep our word, then our word is our bond. If we have a history of not keeping our word, then we are poorer men.
If we surround ourselves with people who keep their word then we can navigate through life less fearful of icebergs. If our life is decorated with liars and cheats and scoundrels then having gold might be a temporary thing.
Gresham's Law
"Bad currency drives out good currency"
When a country debauches their currency, people with hard assets, including strong currency, move them out of the country to avoid confiscation.
The debauching government invariably passes laws to make it illegal to remove those assets (clearly indicating that they intend to confiscate them by theft or tax). That accelerates the flight of those assets.
But whither can hard assets flee once North America becomes unsafe?
To me, beyond a small amount of gold and silver (say between $500 and $20,000 nominal value) the question of gold-based currency is for the academics.
Granted, my views are biased by the technologies I am comfortable with. I see more value in vegetable seeds of varieties that have demonstrated ability to produce crops under a wide range of growing conditions, breeding lines of livestock that has demonstrated the same, iron, brass, dense metals with low melting temperatures, firewood, books...
And family, neighbors and friends who I can trust.
Spot on, Joe. Metals are useful but food and the ability to produce it are vital. Your list is good; you only miss the arms in the hands of family neighbors and friends you can trust.
ReplyDeleteBoat Guy
What Boat Guy said!
DeleteHave you seen goldbacks?
ReplyDeletehttps://www.goldback.com/
I got some from APMEX.com. its a potentially viable alternative.
You've made excellent points and I would also add that another downside to gold is that stocks are likely outperform it in value over time.
ReplyDeleteBut....the greatest attribute that gold and silver have is that they are an anonymous and tax-free way to store wealth. When nobody knows you have them they can't be touched. This is important if you ever get sued by a Liberal or you have to file bankruptcy because of a half million dollar medical bill for a family member's organ transplant. It's insurance. Buy what you can afford.
Never buy gold bars that will need to be assayed. Stick with coins. Small silver bars are ok.
ERJ, my understanding (and practice) is that gold and silver can be useful as a store of wealth to transfer between rough periods and can even be used as money in some cases. But to your point, in any kind of prolonged crisis it may have less value, simply because one cannot do something like eat it or plant with it (Yes, I know you can use it to get such things, but without the skills and knowledge to make use of such things, it is one time affair).
ReplyDeleteI like your thoughts on the ultimate currency being our ability to keep promises. Of note, that seems to work best on the small scale - the larger things get, the less and less individuals seem to see the value in keeping their word.
Is it Money or Currency? "Money" in the fungible sense performs better than one's reputation.
DeleteHow does one transport the value of their reuptation to a new land with new people?
Your name and words and worthless once you eclipse your sphere of influence.
Everyone knows what a kruggerand is worth, though its value may change over time and geography, its still a 1 ounce gold or silver coin. One's reputation is not so fungible.
Quibbling for recreational sake, can you walk into a Krogers and drop a kruggerand into the hand of a cashier and walk out the door with $1800 of merchandise?
DeleteAnother general thought is that likely I might recognize a Krugerrand (although maybe not); I am not sure that it has the universal recognition it once did, especially in off the beaten track sorts of places.
DeleteAlso to ERJ's point, making change would be hard (if not impossible).
Until we get perfect humans there can be no perfect form of money. In troubled economic times diversification is your best bet. Have gold/silver. Also have lead/brass. Have food. Have energy in some form. Have tools and skills. Hitching your economic wagon to one horse in troubled times is generally a recipe for failure.
ReplyDeleteWise words.
DeleteDon't think of gold and silver in terms of dollars. It's a barter item to be used when dollars go the way of Zimbabwe.
ReplyDeleteThink of gold and silver as an asset that can be traded for other tangible assets or even someone's labor.
I look at precious metals as an insurance policy against the day when the paper money is only good for sanitary uses. However, those who have grown up poor know that insurance is often a luxury--food, shelter and transportation come first. In our case, food, shelter and defensive measures come first. PMs are the thing you buy when you have enough of everything else.
ReplyDeleteOr if it's pretty obvious the "end of money" is nigh, and you want to attempt to preserve as much of your wealth as possible. :-(
There isn't enough gold in existence at $2,000/ounce. At $2,000,000/ounce, there just might be. I suspect $2,000,000/ounce is closer to the long term value of the stuff.
ReplyDeleteRemember there's quantity of money, and there's velocity of money. The more often it changes hands, the less it takes to go 'round. Price times quantity = quantity of money times the number of times it changed hands.
Finally, if we were really using gold in place of fiat currencies, gold would be used to buy a tanker of oil. You wouldn't carry a gold coin into a store unless you planned to buy the store, and the land it stood on, and all its stock.
In the ancient world rich men didn't hold gold, they held lands and flocks and herds and vineyards and olive groves, to support their many servants. Riches are productive, metals aren't productive...but they are durable and portable and divisible in a way the productive assets are not.
The problem I see with Gold is...it's a brilliant idea right until the Govt says you can't have it anymore. Do you remember what Roosevelt did in regards to Gold? Roosevelt used the powers granted to the president by the Trading with the Enemy Act of 1917 to make gold ownership illegal. He issued Executive Order 6102, which made gold ownership--both in coins and in bars--illegal for all Americans and punishable by up to ten years in prison. What makes anyone think that another President won't do the same thing when it's convenient? I would buy Silver and have it mainly in junk silver coins but I am nervous/concerned about buying Gold.
ReplyDeleteERJ, no you can't walk into a Kroger and spend a Krugerrand but why would you want to? My butcher will butcher 3 of my steers for that 1800 coin right now today and we aren't even close to mad max. Same with my feed store for seed. My mechanic will replace a transmission for the same. My barber and local gun shop takes silver....
ReplyDeleteI'm a contractor for my day job and I definitely accept metals - and barter.. You have to establish these networks now not after day 1 of mad max. If everyone started WE would be driving the economy in our local areas, by establishing alternatives, not the fed. A softer landing when things fall apart.
Never could understand the mindset of saving metals for apocalypse, it's too late then.