Whatcha got fer sale that I might want to buy w/gold??
LOL!!!
Actually, I'm not against gold, per say. Just like any par value stock, its value depends upon the demand and supply of it.
But you talk about convertibility and spendability. I defy you to go to any store with a piece of gold and buy a newspaper.
Sure you'll be able to, but don't expect to get any change..... <VBG>
As for indentifiability, you'll probably have to have a certificate of authenticity and purity as well. I mean, after all, how many people try to use gold to buy newspapers, let alone do their daily shopping with it.
People would think they were crazy.... :0)
As for scarcity, those who have read the history of gold know full and well that inflation impacts the purchase power of gold just as it has Fiat money. Before the Spanish came to America, Silver and Gold were relatively rare and had substantial value. Within 20-40 years the Spanish economy was so inundated with precious metals shipped from the America's that inflation ran rampant.
Before 1848, gold had achieved a stable value. But after the CA gold strike at Sutter's mill, merchants made literal fortunes overnight selling food, supplies, and booze, for gold at inflationary prices. It seemed that the miners lacking the former and possessing an abundance of the latter (gold), were willing to pay $1 for a an egg (or so the story goes).
This experience was repeated again in the Alaskan Gold Rush latter in that century.
So what was the intrinsic value of gold at Sutter's Mill and the Klondike during those wild times??
What would you have rather have been.... the gold miner sweating for every ounce of glitter, or the merchant who goes to far less effort to accrue his gold??
My point is that Gold can be subjected to inflation or deflation just like any other commodity. The price of mining gold continues to decline. The usage of gold for industrial purposes are subject to deflationary economic pressures as well, and like copper (which is being replaced by Fiber Optics) may find itself replaced in industry by room-temperature superconductors in the future.
But Ole 49'r, I digress. My real point is that I acknowledge that gold has value to certain cultures and individuals for whatever reasons. Where there is demand and limited supply, there is an opportunity to make money... that applies to oil, corn, pork (which will happen next year due to herds being slaughtered enmasse this year)... etc.
But what impacts gold the most is inflation. And there is no inflation right now, but rather global deflation of prices and contraction of economic growth and pricing power. There is currently in progress a massive destruction of Fiat money supply through debt defaults which will only grow worse as the economic "dominoes" continue to fall.
Brazil will bring down its neighbors and their remaining capital will flee to US and European currencies and markets. There is simply nowhere else to go. Inflation and devaluations overseas equates to deflation in the global reserve currencies, the dollar and euro. With economic contractions will come further destruction of capital and money supply.
What happens when a commodity becomes more scarce?? The price goes up. Fiat money is no different when it comes to the reserve currencies. As defaults become more prevalent (and Y2K will likely guarantee this event), credit crunches will occur, contracting economic growth even more and reducing commodity prices. People will hoard cash, bankers will refuse to loan money, and others will sell their gold to raise cash.
Only when the deflationary spiral has bottomed out and prices have succumbed to ultimate surrender will gold then find its value. For when paper money has ceased to be destroyed through defaults and bankruptcies, money supply will once again grow and with that growth will bring the inevitable inflation of money and weakening or its purchasing power.
Now this is my theory and from the figures that others have posted on the tracking of Homestake Mining performance during and subsequent to the '29 crash, I think my theory is supported.
But that doesn't mean that there won't be an opportunity for gold to make it back up to $300/ounce and gold stocks to profit from the mistaken perception that deflation makes gold more valuable. But then reality will set in and people will buy bonds in order to preserve wealth since it is a debt, not an equity and thus will become more valuable as dollars are destroyed through further debt defaults.
A default is a pure and simple destruction of money supply. Destroying money is deflationary as fewer dollars are in the system. Furthermore, the Fed can only increase liquidity so much through the reduction of interest rates. Eventually they will reach the point where depositors are paying banks to hold their money, and not the reverse, as was occuring in Japan just recently (and will happen again later this year).
Prices declining in effect make the dollar/euro/yen stronger with regard to purchasing power. This is deflationary and I opine, makes gold less valuable. When prices are cease to decline and find stability, then you will see the point where gold becomes valuable. It will be at this point that, as prices rise for commodities, the purchasing power of paper currency will decline, and thus become inflated.
However Ole 49'r, I really liked your response....
Thanks for reading this rambling little "tome"... :0)
Feel free to shoot holes in it.
Regards,
Ron |
