Midas Bound
Gold's enduring history as sound money and why it's preferable to fleeting fiat phonies...
Bill Bonner
You can protect your wealth from inflation in many ways – with land, art, housing, business investments, collectibles. But gold is the most ‘liquid.’ It is bought and sold easily. And you don’t have to become an expert on anything… or pay attention to it. It is like a pet dog who never needs to be fed or taken for a walk.
Like a good watchdog, gold protects against thieves and natural calamities. It drives off consumer price inflation and barks when it sees your house on fire. Over the last year, consumer prices have gone up about 8%, some much more than that. And – measured by the Dow – about 10% of stock values have gone up in smoke. Gold has had its good days and its bad days, but has generally kept investors from losing money.
By long tradition, now almost an instinct, people buy gold when they fear that the paper currencies may not be as stable as they had thought. And by fairly recent innovation, they buy ‘paper gold’ because it is a lot easier than buying the real stuff.
One of the key qualities of gold, however, is that it’s very hard to add to the supply. In this regard, it is the very opposite of crypto currencies. You can create quadrillions of new cryptos before tea time… at minimal cost. But every new ounce of gold takes time and money. It has to be found… mined… minted… hauled, stored and protected. It requires engineers, capital, machines, and know-how; it can’t be done by some skinny kid in his mom’s basement.
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Sleeping Beauty
In the hundred years before the creation of the Fed, for example, prices in America went up and down… but came to rest in 1913 about where they had been in 1813. Nobody lost money by keeping his money in gold. (By contrast, the saver who put a dollar bill in his safe in 1913 now has only 3 cents worth of its former purchasing power.)
Lately, however, many commentators have complained that gold is taking a snooze. Consumer price inflation has become headline news. But gold stays in the doghouse, unconcerned, almost nonchalant in the face of the worst inflation in 41 years. Why so?
Part of the answer may be simply that gold had already anticipated today’s inflation. From December 2015 and September 2020, the gold price almost doubled – running far ahead of price increases. By this logic, the gold won’t have to go up for years.
Another part of the answer may be that the ‘gold supply’ is not as tight as we think. The supply of “paper gold” – like paper money – is boundless.
Paper gold glitters but it is not gold. Gold certificates, pool accounts, gold futures accounts and ETFs – they are ways to gain ‘exposure’ to the price of gold without the muss and fuss of owning lumps of heavy metal. No need to bite into the coins to see if they are real. No need to go to the coin dealer… no need to put the coins in a bank lockbox or bury them in the backyard.
Paper gold is much easier to deal with than real gold; so why not? Paper gold is ‘backed’ by real gold. It is linked – by contract – to solid metal, Au, atomic number 79. What could go wrong?
What could go wrong? What always goes wrong! Iron links, binding contracts, unbreakable promises – all give way, sooner or later. Were it not so the divorce courts would be empty, contract lawyers would be out of work, and politics would be as honest as prostitution.
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