Gold is not a 21st Century Investment
Gold Became Preferred Legal Tender.
The fledgling United States made it an official currency and stipulated how much gold and silver went into various coins. We adopted the gold standard, and our currency was redeemable in gold and silver. It stayed that way until we abandoned the gold standard in 1971.
There are those who think we should go back to the gold standard as that backs the currency with real value. But one could argue that gold has the same value as the dollar in that it is only worth what people think it is at a given moment in time. It makes little sense to have a fiat currency backed by a fiat metal.
There is a bigger issue to consider when adopting a gold standard for U.S. currency. If we look at how the gold standard ended, it becomes obvious that a return to it is simply not feasible. A brief look at history shows us that under the Bretton Woods agreement, the nations of world pegged their currency to the U.S. dollar and the United States agreed that the nations of the world could exchange their dollars for gold. This worked just fine until the price of gold went above the $35 dollar fixed level. In an attempt to hold gold down, Western Central banks formed the London Gold Pool and anytime gold was above $35 an ounce they would sell gold on the open market and force the price back below the peg level. This worked until it didn’t.
As gold traded over the peg, France began simply selling its dollars back to the U.S. Treasury and took gold in exchange. It was the largest and most successful arbitrage in all of history. French President Charles de Gaulle encouraged other nations to follow France’s lead and redeem dollars for gold. In 1971, France sent a warship to New York to collect their gold from the vaults of the Federal Reserve Bank of New York as they no longer trusted the value of the dollar. Fearing widespread inflation, Germany withdrew from the Bretton Woods agreement in the same year. The United States did not have enough gold to sell on the open market and hold gold prices down and also meet the foreign government’s redemption request.
The Real Problem with Gold
Going off the gold standard at that point was not a choice, it was a necessity. Returning to a gold standard is not an option unless all nations adopt a gold standard. If they don’t, then a foreign government can once again simply redeem dollars in gold and systematically drain the U.S. treasury. It would only work if everyone went to the gold standard. Not only would that be politically impossible, it is simply not practical.
The world economy has a total value of $77 trillion and should grow to $90 trillion by 2020. Global equity markets have a total value of right around $70 trillion. Supporting all this activity and investment is about $80 trillion of various government-issued currencies. The total value of every ounce of gold ever mined in the history of the world is about $8 trillion.
There simply is not enough gold to support the global economy. Gold is bright, shiny and pretty. It can be turned into beautiful jewelry and décor. It is not going to be a useful currency in times of trouble as so many gold fans think. If we ever have a truly global crisis with economic meltdowns, war, famine and all the other terrible things my gold bug friends warn me about, then gold will be as worthless as paper dollars.
Gold & the Apocalypse
What will be useful?
Watch a few episodes of The Walking Dead and write down what the survivors go hunting for to help them survive.
Canned food has value. Antibiotics have enormous value. So does clean water. The most precious metal of all is lead shaped into the form of ammunition. Not one time do we see the group risk being eaten by a zombie to find gold. It has no value at all. Gold is worth what the buyer and seller think it is worth and that value in a crisis in modern times is essentially zero.
Here is what Warren Buffett said when it comes to investing in or holding gold. “You could take all the gold that’s ever been mined, and it would fill a cube 68 feet in each direction.”
For what that’s worth at current gold prices, you could buy all, not some, of the farmland in the United States or 16 Exxon Mobiles and have $1 trillion of walking-around money. Or you could have a big cube of metal. Which would you take? Which is going to produce more value?”
There is no difference between the value of paper fiat currency and gold. It is worth what people think it is at a given moment in time.
William Devane has said in commercials that it is the only currency he trusts. If you’re taking economics lessons from a 1980s’ soaps star, you’re living in the wrong century.