Mike
Ok, I'll bite. Expand on you views of gold and how it is or is not a store of value.
Its not an issue of whether gold is a store of value, it is but then so are many commodities. The question in my mind is whether gold is the best store of value. I think that in the past twenty years it has been replaced by the major currencies and specificly the US dollar (I can hear the howls of laughter coming from the gold bulls now <g>). And there are specific developments over that period that have caused this shift.
The global capital markets are significantly different today than they were 20 or more years ago. Prior to the early 70s currency values were essentially fixed and were tightly managed by the major governments. These tightly managed currency relationships were supported by extensive capital controls. We have gotten used to the idea that we can move money freely between the US, Europe, Japan etc. Few people remember that as little as twenty years ago there were exchange controls in Britain, France, Italy and many other major economies. This protected currencies from market discipline and allowed governments to pursue debasing policies. There are numerous examples; Nixon's wage price controls that led to the oil crisis, semi-permanent budget deficits, negative real rates of return etc. In this enviroment inflation was eroding currency values and interest rates net of taxation did not provide sufficient income to offset debasement. Gold was the superior store of value.
Starting in the 70s the character of the capital markets change. In the early 70s the fixed currency arrangements collapse. Over the coming years a dollar crisis occurs as the dollar collapses. In response the US launches the Oct 6, 1979 Volcker support package. In retrospect this was a very important development for the future of the currency system and gold's position in that system. Up until that stage the reflex for most goverments was to respond to free market pressure with statist controls. In this case the US responded instead by dealing directly with the markets concerns regarding inflation. The market forced the gov't to defend the value of the currency. In coming years the market forced similar attention to deficit financing, real rates of return etc. Europe and Japan to greater or lesser degrees were forced to respond to their own currency crisises in a similar fashion or lose their capital to markets that did enforce currency discipline. (FWIW it is my opinion that the creation of the Euro is a transparent attempt to build a wall around Europe to allow them to pursue the statist policies they prefer.)
So as a result of the above we now have a global currency system that enforces discipline on free floating currencies. Now a standard response to this is to say that any inflation at all debases a currency and gold does not suffer inflation. However if you factor in interest rates that provide a real rate of return the total return will offset the debasement.
So it is my view that currently the dollar provides superior store of value because the market enforces a continuation of low inflation policies and a continuation of interest rates that provide a real rate of return. Any move on a global basis to reimpose capital controls or to pursue explicitly inflationary policies would swing the balance back to gold.
So there it is Mike, you asked for it <g>.
Henry |
