The Real Story of Gold

[BobK71]

The world has never left the gold standard, and that's because it can't.

The real essence of the gold standard was that central banks sold gold freely at an official paper money price, in order to suppress gold's appreciation, and thereby prop up the value of paper money.  (The 'official' motivation, to stabilize the value of their issued paper, was for public consumption.)

During the supposed fiat-money era, books have recently been written (such as 'Gold Wars' and 'The Gold Cartel') with detailed evidence of central bank suppression of gold prices by derivative trading.

So, instead of suppressing gold by selling physical metal at a fixed price, the authorities now do it by selling gold derivatives at variable prices.  The only difference with the announced gold standards is that 'devaluations' of paper money against gold are now less embarrassing to the authorities.  Gold prices are still kept artificially low compared to true supply-and-demand-based values.

In fact, things really *can't* be otherwise.  If the system of state-issued money required suppression of gold and silver prices (via the metallic standards) for its survival for three and a half centuries, can we really expect it to survive over the last 45 years, with a vast expansion of money and debt, without this suppression?

The authorities only changed the form of the gold standard (without changing its substance) because they didn't have enough gold to support their paper after World War I, in 1945, and in 1971, and because derivative trading has matured.

You are not going to hear this narrative from mainstream economists.  Suffice it to say that they were strongly in favor of the gold standard when it was operating, and are strongly against the gold standard during the 'fiat' period -- both times, giving the political and financial elites just what they want(ed) to hear.  (Since the authorities needed the public to believe in their resolve to redeem paper for gold at the fixed price, even during a run on gold; and they need the public not to have faith in gold's value, under the 'fiat' system.)

This story, upside-down from what has been propagated as conventional wisdom, argues we have a good buying opportunity of physical gold for long-term holding.  Why?  I'll let the reader work it out.

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[cijulangboy]

nice info sir

[7788bitcoin]

Gold has been the standard way to represent value for thousands of years. I guess we won't be able to change this overnight. The value of paper money is really just "trust".

https://www.youtube.com/watch?v=tGk5ioEXlIM&feature=youtu.be&t=10m14s

[Valzador]

I agree with the artificial costs of gold as there's not much gold being dug each year

http://money.howstuffworks.com/question213.htm

[yayayo]

Gold has been the standard way to represent value for thousands of years. I guess we won't be able to change this overnight. The value of paper money is really just "trust".

Well, this is only partly correct. There have been various standards to represent value in the past. In fact, silver was of much more importance than gold as a coinage metal before the British empire switched to the gold standard due to silver shortage. All the various things used for value representation in the past have one thing in common: They required significant effort to be produced / obtained - i.e. they were relatively scarce.

However the underlying psychology of accepting gold and similar things as a store of value is the same as for fiat money. The acceptance of something as money always rests on the trust that other people will accept it as well. The essential difference between gold and fiat money is simply that fiat money can be produced without effort and is not scarce, hence it might devalue due to monetary inflation that creates an oversupply of monetary units.

ya.ya.yo!

[pitham1]

Central banks gold reserves only matter in the case of international trade.
In the case of transactions within the country, people have no choice of currency, whether it is gold backed or not.

[BobK71]

Gold has been the standard way to represent value for thousands of years. I guess we won't be able to change this overnight. The value of paper money is really just "trust".

Well, this is only partly correct. There have been various standards to represent value in the past. In fact, silver was of much more importance than gold as a coinage metal before the British empire switched to the gold standard due to silver shortage. All the various things used for value representation in the past have one thing in common: They required significant effort to be produced / obtained - i.e. they were relatively scarce.

However the underlying psychology of accepting gold and similar things as a store of value is the same as for fiat money. The acceptance of something as money always rests on the trust that other people will accept it as well. The essential difference between gold and fiat money is simply that fiat money can be produced without effort and is not scarce, hence it might devalue due to monetary inflation that creates an oversupply of monetary units.

ya.ya.yo!

I would generally agree.  IMO the ultimately important question is not what is used to represent value, but who gets to decide what and how to use (as) money.

Mainstream economics is fond of saying we shouldn't base such an important thing as money on something, ie gold, whose supply is so unpredictably dictated by nature.  This might be a problem of gold or any other natural-commodity money, but the perverse incentives built into any human-managed money for the elites to destabilize their own system, extract wealth, and make everyone else miserable when financial bubbles go bust, are IMO much worse.

[BobK71]

Central banks gold reserves only matter in the case of international trade.
In the case of transactions within the country, people have no choice of currency, whether it is gold backed or not.

Even domestically, central bank gold reserves play a big role in stabilizing the system after a financial bust, both during the gold standard and today.

While the elites enjoy the lion's share of the benefits of a financial bubble's inflation, most of the pain falls on the public after the bubble bursts.  After the bust, the central bank will try to ease the pain by supplying more money, but its top priority is always (under the gold standard or 'fiat' system) to maintain faith in its money -- since that is the elites' ultimate source of power.  So its easing is always constrained, and this is part of why the busts are so painful.  The role of (large) gold reserves is to ease this constraint somewhat, and allow, ultimately, a higher standard of living during this period.

[Jimbola3]

Gold has been the standard way to represent value for thousands of years. I guess we won't be able to change this overnight. The value of paper money is really just "trust".

Well, this is only partly correct. There have been various standards to represent value in the past. In fact, silver was of much more importance than gold as a coinage metal before the British empire switched to the gold standard due to silver shortage. All the various things used for value representation in the past have one thing in common: They required significant effort to be produced / obtained - i.e. they were relatively scarce.

However the underlying psychology of accepting gold and similar things as a store of value is the same as for fiat money. The acceptance of something as money always rests on the trust that other people will accept it as well. The essential difference between gold and fiat money is simply that fiat money can be produced without effort and is not scarce, hence it might devalue due to monetary inflation that creates an oversupply of monetary units.

ya.ya.yo!

Gold has real value while paper money is just made for easy trade. Banks are making money out of nothing which means gold backed system is gone and the only one getting profit is the elite but if we still used gold, the currency would be limited and everyone would have equal opportunity to earn money.

[Barnabe]

Gold has been the standard way to represent value for thousands of years. I guess we won't be able to change this overnight. The value of paper money is really just "trust".

Well, this is only partly correct. There have been various standards to represent value in the past. In fact, silver was of much more importance than gold as a coinage metal before the British empire switched to the gold standard due to silver shortage. All the various things used for value representation in the past have one thing in common: They required significant effort to be produced / obtained - i.e. they were relatively scarce.

However the underlying psychology of accepting gold and similar things as a store of value is the same as for fiat money. The acceptance of something as money always rests on the trust that other people will accept it as well. The essential difference between gold and fiat money is simply that fiat money can be produced without effort and is not scarce, hence it might devalue due to monetary inflation that creates an oversupply of monetary units.

ya.ya.yo!

Gold has real value while paper money is just made for easy trade. Banks are making money out of nothing which means gold backed system is gone and the only one getting profit is the elite but if we still used gold, the currency would be limited and everyone would have equal opportunity to earn money.

I don't agree, if the currency is limited the ones that would benefit the most from it are the ones who currently have gold. It wouldn't change anything.

[BobK71]

...if the currency is limited the ones that would benefit the most from it are the ones who currently have gold. It wouldn't change anything.

There would be an initial redistribution of wealth, yes, but everyone would benefit from a more market-based financial and economic system, from that time on.

Also, rewarding holders of gold would also give incentives to savers not to trust state money as much in future, which would also restrain future asset bubbles driven by central banks, politicians, and bankers.

[BobK71]

Gold has been the standard way to represent value for thousands of years. I guess we won't be able to change this overnight. The value of paper money is really just "trust".

https://www.youtube.com/watch?v=tGk5ioEXlIM&feature=youtu.be&t=10m14s

Nice show!

Bankers are only half of the state-bank alliance to prop up money, debt, and other human-issued financial assets with state power.

Since the assets are over-valued, plus the elites want to benefit from issuing as many of them as possible (and hide bad news) while the system is stable, eventually some asset becomes so over-valued that it must crash.

When it does, the entire economy pays the price of losing savings, business, and jobs.

This is essentially how the political and financial elites jointly receive unearned wealth and power, at the expense of everyone else.

[The Sceptical Chymist]

If the gold market is so manipulated, why would anyone want to be in it?  You wouldn't play a slot machine that was rigged, would you?  Do you think you're going to be able to wait it out? 

And where does bitcoin fit into all of this?   It is backed by nothing.  It only has value because people agree it does.  It has no use other than to store value, unlike metals.

[BobK71]

If the gold market is so manipulated, why would anyone want to be in it?  You wouldn't play a slot machine that was rigged, would you?  Do you think you're going to be able to wait it out?  

And where does bitcoin fit into all of this?   It is backed by nothing.  It only has value because people agree it does.  It has no use other than to store value, unlike metals.

Buying gold in the modern age has always been a bet that the manipulation (whether gold standard or derivative-based manipulation) fully or partly fail during the time you hold the gold.

Over the last 200 years this turned out to be a good bet only a few times, in the top countries of the global system (i.e. Britain, US.)  The bet turned out good when Britain was forced off the gold standard in 1931 and when the US was forced to devalue in 1934.  It was also good during the de-facto devaluations of the 1970s through early 80s, and during the mid-to-late 2000s.  The bet was not good during the entire 19th century in the two countries.

You can see that the trend is loss of control on a more frequent basis.

The fact is that manipulation must still eventually bow to overwhelming market forces, due to the incentives for the elites to destabilize their own system, regardless of the form of manipulation.

Another way of looking at manipulation is that the central bank is subsidizing your gold investment.  What could be better?  But, as we have seen, this logic is highly situation-specific.

Bitcoin is a good demonstration that *any* money is just a convention for transactions.

[BobK71]

Gold has real value while paper money is just made for easy trade. Banks are making money out of nothing which means gold backed system is gone and the only one getting profit is the elite but if we still used gold, the currency would be limited and everyone would have equal opportunity to earn money.

Gold-backed money, which was practiced for most of the modern age since the early 1600s, is just another method for the elites to receive free benefits and destabilize the economy.

Paper money becomes IOUs for gold, and other assets are based on the paper.  But the elites will use state power to support credibility in the IOUs and issue too many IOUs (or derived assets.)  All global dominant empires (the top of the world system in their times) eventually saw their system crash and their countries decline -- including 16th century Spain, 17th century Netherlands, and 19th century Britain.

Financial inflation will be slower under this system, and this may be a benefit for the public, but the system is not fundamentally different from today's.

The elites and the media will of course never say this beforehand, but during the 'fiat' era they have always kept gold as a last resort (as Alan Greenspan recently asked, why do central banks hold gold?)  If their system proves unsustainable, they will go back to gold-backed money in some form.  (In an age of sophisticated financial engineering, it probably won't be the simple gold standards of the past, but it won't be materially different.  See India's recent gold 'monetization' scheme for hints.)  This is a good reason to hold gold.