The value of gold can hold only when everybody wants to buy gold and keep and does not want to sell.
The only people in the world who keep gold forever are those from ancient civilisations which must have known, from history, that gold is something that has lasting value.
The only institutions in the world which keep gold forever are the central banks when gold is the only money and money is gold. This was true in the past when first it was the silver standard (Spain and the Incas) and then evolved into the gold standard. During the silver standard, silver was dug out in Peru and after trading was buried in the soil in China by corrupt officials. The gold standard was used by the British and abandoned by the Americans.
The reason was that the standard restricts trade as there was a shortage of the money supply. When money becomes fiat, there is no shortage of the money supply and the only problem becomes an oversupply. The answer to the problem of the money supply is a rule on the restriction of the money supply which no government today seems to be willing to adhere to. The alternative answer is a return to the gold standard whereby the supply of money is constrained by the output in digging gold out of the ground.
Bitcoin ostensibly comes in to replace gold as a standard for the money supply where the supply of bitcoin is dependent on some computer algorithm and the amount of precious electricity required to run the program. But this is no different from a money standard based on the number of kangaroos in the world, or any other exotic or esoteric output. Furthermore, who gives the authority to bitcoin for bitcoin to be the world standard for money - nobody. But this does not detract people from buying paintings of dead people as the supply would certainly be restricted to the existing available.
Same as for bitcoin, there is nothing to prevent gold being accumulated and used in some cases for the payment of bilateral transactions, if both parties so do agree, just as in any other barter trading arrangement.
The point to make is that the price of gold is very high now because first there are people want to buy and keep gold and are buying and keeping gold. Second, there is an enormous of fiat money that has been printed and because of the oversupply of the money supply, people are selling the fiat money for real and tangible assets like gold, silver, minerals, oil, etc. Not sure how real and tangible bitcoin is.
A more interesting question is: Will the price of gold ever reverse? If the people who are keeping gold do not need money and are keeping the gold forever, then no.
Under what conditions will the price of gold reverse? When the opportunity cost of holding money is too high. I.e., when the interest rate is high, say, 5% or 8% p.a., on fiat money. When the return of investment is high, such as in stocks and shares. This may be in certain stocks, as the global economy is adjusting the current technology which seems to be threatening every human job. This last point is interesting.
If computers and machines are doing all the work producing output, who will be consuming that output. If humans are out of a job and have no money, then humans cannot consume that output. The machine produced output will go bankrupt and have to stop.
What do humans do then? Humans go back to the farm and live a simple life eating durian.
There seems to be a way out for policymakers today. Forget about the super-rich investors in technology which are producing output that no humans can afford. Focus on the agriculture sector whereby owner-farmers can grow enough simple food to feed their families. There is plenty for farm-based industries to grow, using the use of super-machines.
Accumulate gold by all means. Most likely this is your savings, your surplus capital. You have more money than you will ever need. Trading in gold and other assets is just a game you play to while away your time alone.
For those who want to live, it may be more useful to engage in more physical and down-to-earth activities which have direct benefit to your physical and mental health, making you tired and hungry, so that rest and eating are joys in your life. The value of gold is just a theoretical consideration done at leisure in quiet solitude.
3 comments:
1/n
These days the value of anything depends on the US Federal Reserve Bank. Just by hinting whether its interest rate will be cut or raised can cause cashflow reverberations across the globe.
Treasurers in big companies and central banks will forage the markets for best interest incomes based on the interest rates in countries, and families will pull out their calculators after receiving notice on the revised mortgages and loans they will have to service to repay their local banks for loans to buy a house or for other uses. And lenders will wonder if their hedgings won't be shaved that will affect their projected bottomlines.
Underlying all this is the status of the US dollar whose convertible yields oscillate in tandem with the hum of its printing press based on the US federal assessment to find its sweet spot pressure point between inflation busting and quantitative easing. Focused solely on US economic recovery, Powell in July has said it's a rough balance playing on the US interest rate but it can't be lost on him as it has been apparent to everyone else that the US national debt is now a runaway USD35 Trillion.
As the US is the world's default consumer, the size and growth of this debt and the servicing of its repayment gets pushed further into the future, thus rendering the valuation of anything and everything superfluous in a world that has become too sensitized to the calculus of hinted announcements.
2/n
Moreover, for being the prime consumer, US debts get serviced either by its own agency buying them or by countries which run a trade surplus buying US bonds. Strangely left unsaid is in the case of the latter, what happens when those bonds mature and the holder wants to cash out at the very moment when the value of the US dollar has changed to his disadvantage thus creating a prelocked opportunity cost of investing elsewhere which is magnified by the unsalvageable size of the US debt.
Buffett has alluded to this point. What he didn't add is that if the buyer of the US bond through a local bank in his own country is a manufacturer who only makes less than 5% margin, the return upon maturity for banking with the US can wipe that out, jeopardize his cashflow and in the aggregate, raise unemployment levels and risk his country's GDP fall, thereby distorting per capita productivity measures, hence affecting national policy planning.
Even at local levels, this US overlord effect has reared its tentacles. One is unsure whether it is still fashionable for local banks to mandate a personal declaration required by the US when opening an account with the banks just because the US wants to identify any subscriber indirectly affecting its international financial order - and thus susceptible to its sanctions and freezing of assets. Thus the prevailing efforts by countries to de-dollarize either by local currency swaps, crypto transactions and come one day, perhaps direct barters.
Under such circumstances, it is understandable why people seek to put their money in assets which can avert the rollercoaster effects of the US financial system, whatever may be said for its role in the past now diminished by the US intemperate actions as its unipolar hegemony is being challenged across the globe. The desperation is palpably noted even when knowing gold doesn't carry dividends.
3/3
Gold prices have risen in the twenties last year and again this year to-date because people can see the whipsaw geopolitical risks involved. Whether bought by central banks looking to dedollarize or by refiners which in Dubai have been clamped short-term owing to money-laundering, or even by traders and speculators hoping to ride the trend and make a bundle in gold futures over silver and other metals, gold has momentum at the moment, although in the case of China and India, it would be ruinous to them if they attempt to raise their per capita gold reserves against the massive post- Bretton Woods US Fort Knox holdings.
On the flip side, gold miners and players in exchange-traded funds have experienced negative returns. Similarly, palladium has tanked.
Left to be said are foreign workers. They can't open local bank accounts so what's left after they send some home, they buy gold in the form of chains, bracelets and rings, in many cases through micro-financiers. Then they save up by skipping meals and wearing secondhand korean/japanese garments bought for a song at the local weekend farmer bundle markets; it's a thriving industry bolstered by workers facing harsh sun and heavy rain who if daily-rate paid depend on the vagaries of the weather to be able to work.
In sum, we may say value is a function of scarcity in markets but is it commutatively also that scarcity is a function of value? When one reduces what one needs to a minimum after concluding wealth is an addictive vanity, what may be scarce to others is infinitesimally insignificant to oneself.
That said, money is made when things move instantaneously at each point of the curve of change. This is the second derivative of market calculus. What may perhaps be the first derivative should be inner peace from letting go and accepting that we already have what is needed for us to make the journey to our respective ends. Or, learn the purifying great Lesson.
This must be true since it is mystifying how Auric Goldfinger could be sucked out of the window of the plane whose circumference couldn't have been one-fifth his girth and all that after failing to nuke Fort Knox to increase the value of his personal holdings for creating gold scarcity.
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