The Real Story of Gold

[BobK71]

If you think that gold is in trouble because it hit a five-year low, read on!

Serious books were recently published, detailing evidence of central bank suppression of gold prices.  If you think about it, this changes everything.  We have been led implicitly to believe that gold is just a shiny object, obsessed over by gold bugs, and even they can get tired of it.

But this news means that central banks' own assessment is that they must suppress the price of gold in order to maintain public confidence in paper.  And their intelligence on global sentiment is probably better than ours.

To get a full understanding of the issues, we must start with the gold standard era.  Why did central banks swear up and down about upholding their "moral commitment" to redeem paper currency for a fixed amount of gold?  The stated reason was that they wanted to safeguard the stability of paper money and thus the economy.

The metallic standards of the past are of course considered mistakes by modern mainstream economists and central banks, though one has to wonder why the "mistake" dominated the Western monetary system for about three hundred years that were littered with periodic and severe financial crises, and was only abandoned when states were about to run out of gold for redeeming paper at the official price.

Given this history, we could be forgiven for a little skepticism.  It's hard to avoid concluding that the real reason for gold standards was to prop up the value of paper currency (or, equivalently, to suppress the market price of gold in paper currency) so that top politicians and banks could continue to receive benefits by issuing paper money and debt.

The way it worked was that the system ensured that it didn't make sense for savers to hold gold.  Gold earned no interest, while paper money was guaranteed by the authorities to redeem a fixed amount of gold, and this promise was credible while the state had enough gold in the vaults.  Meanwhile, holders of gold lived under the same price inflation as everyone else, due to the expansion of the money supply from currency and debt issuance.

However, the incentives for the elites were to issue maximal money and debt, so the system was never fundamenatally stable.  Aside from periodic bank debt crises that came with major economic pain for citizens, in 1890, even the core of the global system, the Bank of England, experienced a run on its gold that needed help from other major countries to restore confidence.  By 1931, Britain had to give up its peg against gold.

Given that the essence of the gold standard was to suppress the "market" price of gold, that system was not very different from what we have today, even though the techniques of suppression are more sophisticated (ie by trading derivatives) and the "target" prices of gold more flexible.

The final unpegging of the dollar from gold in 1971 was a change from explicit to hidden suppression of gold.  The hidden nature of the suppression also made gold price rises (in effect, devaluation of paper against gold when the authorities had no choice) less embarassing.  Between $35 and $1000 per ounce, the dollar has lost 97% of its value.  Armed with the evidence, the Great De-monitisation of Gold has now been discovered to be the Great Devaluation of Paper.

All of this points to the reality that is the polar opposite of conventional wisdom, that the gradual weakening, and then the abandonment of the gold standard were *good* news for people who believe in state-free money.  These events signaled the gradual loss of control by the authorities in suppressing gold.  They made gold more like money and paper currency more like debt.

So, hopefully, we are waking up to a hidden reality that money is not what the elites make it, but what people make it, in the long run.  The elites may have been granted a lot of power by the system, when they first establish a mechanism of manipulation.  But that very power gives these elites the irresistible incentives to undermine their own system, so that the long arm of nature always catches them, in the end.

This power of nature was made clear when China had to punish by death those who transacted with anything other than the state paper money, and then had to go back to physical silver anyway, in the 1500s.  (BTW, China was no Zimbabwe -- the paper money was not poorly run and had lasted for a few centuries, like our own.)

Gold (or any other metal) may not be a perfect monetary system, but given the nature of the elites that humanity must deal with, it may be humanity's best hope.  With the possible exception of Bitcoin, of course.

[BitProdigy]

Gold (or any other metal) may not be a perfect monetary system, but given the nature of the elites that humanity must deal with, it may be humanity's best hope.  With the possible exception of Bitcoin, of course.

Gold and all metals are inferior to bitcoin. As you point out, gold never stands on its own, it always requires a currency that is backed by gold, and no matter how much they swear and promise they will uphold this standard, they always end up printing more notes than there is actual gold and they have to come off the gold standard and back to fiat.

This cycle is impossible to stop because gold NEEDS a currency to work, and currency ALWAYS gets printed too much. The only thing that stops this is the invention of bitcoin. Bitcoin needs no currency because it is already easy to exchange, and it has all of the scarcity and controlled supply of gold that makes it a good store of value.

Gold will get eaten up by bitcoin and will be just another metal like nickel or titanium that is used for industry and jewelry, not money.

[CoinBateman]

Alot of people like gold because it is fungible and has been the long term standard store of value. It is a reference point however, and intrinsically has no additional value over bitcoin. In fact, it can be argued that Bitcoin has more intrinsic value, that is in itself another debate.

Gold is just going through the market cycle, none of its fundamentals have changed and no other commodities have entered the space to relatively de-value Gold. So, really its not a problem, just buy when its blood on the streets.

[OROBTC]

...

I would not announce the Death of Gold so quickly just because a great new set of technologies has been invented.  Gold has been valued by humanity -- by almost all cultures -- for 5000 - 6000 years.  I doubt that 5000 years of historical value for gold will disappear just because Bitcoin has come along.  Through the millennia, gold has proven itself hundreds of times as the best Store of Value around, beating EVERY fiat currency.  Why would people who really understand wealth (like the central bankers and the Rothschild family) hold so much gold?

My *guess* is that Bitcoin will be a game changer.  But, "technology often eats its children..."

My other guess is that gold will always be expensive, and always held in much esteem.

Gold and Bitcoin are quite complementary.  It's just smart to hold some of each.

[manselr]

Gold HAD his time. Now it's over, along with the fiat scam. Sure, Gold back them made sense, but right now Bitcoin deprecates it on every single aspect you can ask for. And no, there's no inherit value to Gold or any money. Money is is money if people will value it, period. The rest are the characteristics of said money, and nothing, nothing ever has been as good as Bitcoin at being money. Bitcoin takes the best of both worlds from gold and credit and twists it into a new paradigm of unknown unknowns. The possibilities are endless.

[Wekkel]

I think Bitcoin and Gold could reinforce each other. A stable numeraire.

[BobK71]

Thank you for your thoughtful replies.  This give-and-take is what makes this forum so valuable and fun.  To lay out my take on the points raised by all your replies:

It may seem as if gold or silver had been associated with paper forever (as that's what our great-great-great-grandfathers and before lived under,) but medieval money were simply gold or silver coins.  Precious metals being fungible, there were few practical problems for these coins to circulate.  (The association with paper was in fact the invasion of state-based money that signaled the beginning of the modern finance-burdened economy.)  If we need to make money electronic for the modern age, Austrian economists have proposed systems like 100 percent reserve banking and totally free banking.  (In effect, having an electronic embodiment of gold or silver without losing the integrity of the system as we have since paper money started in the Dutch Golden Age.)

It's arguable that Bitcoin is a better money than gold and silver.  However, IMO old is good in the world of money, everything else being equal.  The reason is not just natural trust by people.  The money has stood the test of time.  We don't know for sure what problems will come up if Bitcoin scales up -- a couple of things right off the top of my head would be quantum computing defeating cryptography, some unknown security hole, and scalability of the system.

That said, as one reply points out, there's really no reason why two or more monies can't live healthily together, with the market determining the exchange rates among them.  Gold and silver did this for millennia.  But this will be true *only if the state gets out of the way*.  When state paper gets involved, something called Gresham's Law almost ensures that the system becomes unstable.  (This was why countries moved away from bimetallic, ie gold+silver, standards and ended up with gold only.)

I would totally agree with the idea that money is no more than a standard, and that no money really has any significant intrisic value.  In fact, national currencies have a huge advantage in this regard, as their legal status given by the state gives them something almost as good as intrinsic value.  (But, of course, as we have seen, this very advantage is an irresistible invitation to theft-by-over-issuance by the elites, and so always gets eroded away.)

[BitProdigy]

It may seem as if gold or silver had been associated with paper forever (as that's what our great-great-great-grandfathers and before lived under,) but medieval money were simply gold or silver coins.  Precious metals being fungible, there were few practical problems for these coins to circulate.  (The association with paper was in fact the invasion of state-based money that signaled the beginning of the modern finance-burdened economy.)  If we need to make money electronic for the modern age, Austrian economists have proposed systems like 100 percent reserve banking and totally free banking.  (In effect, having an electronic embodiment of gold or silver without losing the integrity of the system as we have since paper money started in the Dutch Golden Age.)

E-gold has been tried and failed because it is necessarily centralized. There has to be a vault somewhere to store all the gold and ensure that there is not more "e-gold" out there in circulation than there is gold in the vaults and this necessitates storage fees and employees and creates a central point of failure that must be trusted, the very thing that bitcoin set out to eliminate the need for. E-gold was shut down by the government and really any centralized system such as this will not survive either. The future will be decentralized.

[markj113]

Strange why the media keeps trying to force the point to the sheeple that gold is an ancient relic and now worthless yet people in power are buying as quick as they can get their hands on it.

Russia, China are buying it by the tonne.
Countries are now repatriating their gold.
Texas is repatriating their gold from the FED.
Public gold/silver demand has gone through the roof.

I think the powers that be are currently suppressing gold price through paper gold manipulation enabling them to accumulate physical gold at rock bottom prices.

When the time comes the price of physical gold will go parabolic disconnecting from the paper gold price.

[foodstamps]

Precious metals have been used for thousands of years as a sign of wealth. This has occurred in civilizations that had no known contact with each other over vast distances, separated by oceans. If we ever find intelligent life on another planet, I would not be surprised if they did use, or at some point in past they used precious metals for the same purposes as ourselves.

Cryptos are only as strong as the network. If a natural disaster ever happened, killing a large percent of the worlds population, there is a chance we could enter another "dark age". Past intelligence and skills could be forgotten. Infrastructure could collapse. Electricity and the internet could become a thing of the past, a distant memory of our generations to come. In the first years, basic supplies would be most valued where everything works on a sort of barter system. Eventually though, as society rebuilds itself, a form of currency would be needed. If we can base anything on the past, this currency would once again involve precious metals, you just cant get rid of them.   

[BobK71]

E-gold has been tried and failed because it is necessarily centralized. There has to be a vault somewhere to store all the gold and ensure that there is not more "e-gold" out there in circulation than there is gold in the vaults and this necessitates storage fees and employees and creates a central point of failure that must be trusted, the very thing that bitcoin set out to eliminate the need for. E-gold was shut down by the government and really any centralized system such as this will not survive either. The future will be decentralized.

If the public lacks the right awareness, even if bitcoin wins, the elites will do to bitocoin what they did to gold.  It would start with borrowing bitcoins from the public by issuing trusted public debt, evolving into a bitcoin-standard, etc.  If the public has the awareness, any form of leverage will be banned from gold banking where the contractual relationship is storage, not debt.  And banks would compete, and the public would diversify their holdings among banks for safety from criminal conduct.

So the ultimately important thing is not what form money takes, but public awareness.  Without the awareness, we'll never be economically free, no matter what.

The really critical thing is to get the state out of money.  All forms of money would have exchange rates set by the market and sink or swim by their real usefulness.  If you are fighting cancer, you don't spend much time debating which car to get when you cure it.  One car might really be better than another, but it's kind of a minor issue.

[Nizam ibrahim.P.N]

It does not have any real story . We humans are making a real story about it!!  

[OROBTC]

It does not have any real story . We humans are making a real story about it!!  

I don't know if that's true...  Most of the gold in the universe, I have read, was created in supernovae and/or large stars colliding.

Gold (and platinum, etc.) is truly "star stuff", Supernova Born.

And much of the gold and platinum-group metals sank to the core of the Earth when it was still hot.

[HarHarHar9965]

It does not have any real story . We humans are making a real story about it!!  

I don't know if that's true...  Most of the gold in the universe, I have read, was created in supernovae and/or large stars colliding.

Gold (and platinum, etc.) is truly "star stuff", Supernova Born.

And much of the gold and platinum-group metals sank to the core of the Earth when it was still hot.

humans were created by star dust too, and there are a lot of theories which support crazy stories, I believe that we all are a part of a continuous random moment and we are free falling into a doom, and we complicate our lives just with thinking ourselves to be too significant. Nobody is as important as nature, not humans and not gold. Gold is a shiny object which people will kill each other over, and that's fucked up. That's the real story.

[BobK71]

humans were created by star dust too, and there are a lot of theories which support crazy stories, I believe that we all are a part of a continuous random moment and we are free falling into a doom, and we complicate our lives just with thinking ourselves to be too significant. Nobody is as important as nature, not humans and not gold. Gold is a shiny object which people will kill each other over, and that's fucked up. That's the real story.

Gold's physical properties make it a good form of money, no more and no less.

Killing each other over any form of money is fucked up, I agree.  But that is part of the "capitalism" we live under.  Under this system, we have to have economic growth, or the economy implodes.  Since so much money and other financial assets are created and propped up by the authorities rather than a free capital market, if there's not enough real growth to justify the value of the assets, investors will liquidate and we're in for deflation or depression.  So, in thousands of subtle ways, the system nudges everyone to seek profit and economic growth at all cost.

So, we shouldn't be surprised to have so much pollution, unhappiness and conflict.

[OROBTC]

...

Gold Update: Manitou Springs, CO "turista jewelry shop"

(a real story)

I prices some purportedly 96% pure gold nuggets there yesterday (on vacation).  The one I did the arithmetic for went like this:

1.5 gm (approx. 1/20th of a toz) was for $115.00.    Actual gold value: +/- $40.

Ahh, no thanks!

[Q7]

Well even if it is true, they can go on to surpress the price forever as long as they want. And since the spread on gold trading whether on buying or selling is high, you will actually lose out the moment trading starts. Plus don't forget they pay zero interest and some banks will actually charge you the maintenance fee for the gold account. Either way you will still lose out.

[bryant.coleman]

The price of gold can't be suppressed for too long. It is estimated that only some 60,000 tonnes of extractable gold remains to be mined out, and at the same time, the demand is increasing very sharply year on year. The current rate of extraction (3,300 tonnes per year) is definitely not sustainable, and in 10 years or so, there will not be enough supplies to cover the demand.

[Mirdude]

Great read, thank you dude

[RealBitcoin]

Gold (or any other metal) may not be a perfect monetary system, but given the nature of the elites that humanity must deal with, it may be humanity's best hope.  With the possible exception of Bitcoin, of course.

Gold and all metals are inferior to bitcoin. As you point out, gold never stands on its own, it always requires a currency that is backed by gold, and no matter how much they swear and promise they will uphold this standard, they always end up printing more notes than there is actual gold and they have to come off the gold standard and back to fiat.

This cycle is impossible to stop because gold NEEDS a currency to work, and currency ALWAYS gets printed too much. The only thing that stops this is the invention of bitcoin. Bitcoin needs no currency because it is already easy to exchange, and it has all of the scarcity and controlled supply of gold that makes it a good store of value.

Gold will get eaten up by bitcoin and will be just another metal like nickel or titanium that is used for industry and jewelry, not money.

Spot on, you deserve a +1 there...

But gold still can be used as a commodity or for storing big wealth, if you can afford the security equipment.

However as a day to day currency as the blood of the economy, it does need bitcoin.