Give Me All Your Gold

A couple of days ago I was listening to a man talk about how he's afraid that he might lose his house. You would think he was another victim of the housing bubble but his investment of choice was gold.

The market price of gold has been slowly declining for the last few months. Even in India, a traditional importer of gold, the demand is down. Gold like any other commodity is tied to the laws of supply and demand.

As the world economy has slowly improved, traders in gold have started to cash in and reinvest. I wonder what Ron Paul do if gold returns to $500 an ounce?

It's difficult not to think of gold as money and just see it as another commodity metal like scrap steel. In a way our world would be crippled without steel as if all of the gold in the world disappeared tomorrow it be a mere bump in the road. Gold does not have many practical uses. In industry gold plating resists corrosion, there are specialty electronics that use gold wires and components, dental work and jewelry -that's about it.

Gold represents concentrated value partially because of its rarity. In total steel is more valuable than gold but gold is still more valuable by the ounce.

Part of gold's value is emotional and historical. Gold might have been the first metal people discovered. As other metals are found in ores, gold does not combines easily with other elements, so it's possible to fine nuggets of pure gold. The metal is soft and easy to work, it's so soft two pieces of pure gold can be hammered into each other to form one piece. It can also be hammered flat into a foil only a few atoms thick and used as gold leaf. 30 grams of gold can be made into sheet of leaf that covers over 9 square meters. Gold is so malleable you can think of it as the silly puddy of metals.

Being shiny bright and yellow only added to gold's appeal. Over 6,000 years ago some of the first decorations and jewelry were made with gold. In a world where few things were bright and shiny, gold was probably a high value commodity to show off a person's status. It easy to see who is king when they wear a golden crown.

At least 5,000 years ago gold was used as money. The gold was traded by weight and gold was even counterfeited when cheaper metals were melted into the gold ingots. Probably by accident someone discovered that you can assess the purity of a gold by scraping the object across certain types of fine grain flinty stones. The color of adulterated gold dust on the stone will be lighter and paler compared to pure gold. This became known as a touchstone. Touchstones where used in the Indus Valley of India as far back as 3500 BCE.    

It wasn't until 500 BCE gold coins appeared in Turkey. Gold, silver and bronze could then be traded in pre-measured amounts, the idea of currency took off. A person could make a purchase by counting out a few coins instead of having to get a scale and weighing it. In about a century the whole Middle East and Mediterranean basin where using coins. Kings like coins because they could names and faces on them. The Roman Empire used coinage as propaganda as well as trade. 

The fellow who was losing his house was seduced into buying gold because of the fear of future inflation and the possible devaluation of paper money. It was a hard lesson to find out even gold fluctuates the same as fiat currency.

Not much of an economist myself I asked a friend back in New Jersey why the world moved away from the Gold Standard. Part of the reason was to give governments greater control over their currencies. The greater control meant that governments could step in  and intervene during economic downturn. Economic recessions and depressions were much deeper and hard hitting when the United Sates was on the gold standard. 

Nothing stops the United States from going back on the gold standard but it would be like parking our cars and using horses for transportation. If the oil industry should also collapse then having a horse is a smart move; the horse is simple, eats grass and doesn't need the complex infrastructure an automobile needs -but you can't operate a modern society on horses. Like the horse using gold as money is simple but it's also a step backwards where a lot of modern financing would be impossible. If we go back to using gold then shotguns and canned goods might be the best investment of all.

Maybe the Aztecs said it best of all, their word for gold translates as "excrement of the Gods".

A small tale on the value of gold.

This clip is a little difficult to explain, part of it is a late night TV movie host and thew movie he's trying to explain is Americathon. Made in 1979 the movie is about a bankrupt America in 1998. It's funny and campy -and it's like a political Rorschach Test.