(This
article originally appeared in the Huffington Post on September 23, 2009.)
http://www.huffingtonpost.com/nathan-lewis/what-1000-gold-means-to-y_b_295866.html
The
dollar price of gold is above $1000 and new all-time highs are likely. Maybe
it will go quite a bit higher.
OK, so
what? Does this mean that wedding bands get more expensive or something?
Most
people probably look at gold as some minor metal -- not even in the class of
major metals, like copper, aluminum or iron. Maybe you could group it with
vanadium, molybdenum and rhodium. It might be good for a little gamble, but
it is hardly an investment.
If you
look more closely at gold, you discover that there is hardly any compelling
investment thesis at all. Molybdenum, for example, is used in steel alloys.
Maybe places like India and China will use a lot of steel alloy to build all
kinds of things. Since it is not so easy to open a new moly mine, there could
be a supply/demand imbalance, driving up the price of moly.
There
is never a supply/demand imbalance for gold. About 85% of all the gold ever
mined in all of history still exists, as jewelry and stockpiles of bullion.
Certainly no shortage of supply. Demand for gold -- for genuine industrial
purposes, such as electronics -- amounts to about 2% of world production per
year, and 0.04% of the existing supply, (I consider use in dentistry to be
jewelry-like.) Not much demand there either.
In
fact, it appears that gold is among the most useless things on the planet.
If
something is "going up," but there is no fundamental reason for its
rise, then it appears to be a "bubble." People are just buying it
because ... it's going up. Like tulip bulbs or something. Supposedly, there
is a "superstition" that drives people to buy gold during times of
economic difficulty. Tulip Bulbs of Doom?
These
are the typical litany of excuses offered by people who don't own gold. These
are not the reasons people buy gold. They are, rather, a catalog of confusion
from people who don't understand why other people would own gold.
If you
talk to people who actually buy gold -- a lot of it -- they will tell a
completely different story. Their reasons can be summed up in the words of
J.P. Morgan many years ago:
"Gold
is money. That's it."
All
right, "gold is money." What does that mean?
The
principal characteristic of ideal money is that it is stable in value. Gold
is the closest available approximation of this ideal. In other words, gold is
money because it is stable in value.
All
serious gold investors will tell you some variation of this basic
observation.
This
"moneyness" of gold is recognized throughout the world. You could
jump out of an airplane and parachute into any major or minor city in the
world -- from New York to Djibouti, Brazzaville to Chiang Mai -- and you
would probably land within walking distance of someone who will buy your gold
near the world market price.
Thus,
gold is the supranational money of mankind, because it is stable in value.
One
reason it is stable in value is that it has no significant industrial use --
and thus no supply/demand issues that could cause a change in value. Thus,
gold's apparent "uselessness" is a necessary condition for it to be
useful as money.
You
can think of gold as a currency -- just like the dollar, euro or yen.
However, unlike those floating, government-manipulated fiat currencies, gold
is stable in value.
From
this you can understand why all major nations used a gold standard system,
for basically the entire history of western capitalism, until 1971.
The
"dollar price of gold" is the exchange rate between dollars and
gold. The "euro price of gold" is the exchange rate between euros
and gold.
When
it takes more dollars to buy gold, it doesn't mean that gold is "going
up." Gold is stable in value. It means that the dollar is going down in
value.
If you
have dollar commitments, such as bank accounts, loans, bonds, employment
contracts, pensions, etc. -- or assets denominated in dollars such as
equities or property -- and the value of the dollar is going down, that means
that the real values of all those assets are also going down.
Melting
away like ice cream on a hot summer's day.
When
the value of a currency declines, usually all real asset values decline
alongside. So, if you just stay even -- avoid losing value -- that's pretty
good. While the value of gold remains stable, its purchasing power can rise
because the value of everything else is falling.
If it takes more and more dollars to buy an ounce of gold, you shouldn't be
surprised if it takes more and more dollars to buy all kinds of things. This
is generally known as "inflation." However, this process is quite
slow, and it can take many years -- even decades -- for prices to fully
reflect the decline in currency value. Also, the process can be masked by
other processes which might induce falling prices, such as recession and debt
liquidation.
Thus,
although the dollar declines in value, the decline in purchasing power of the
dollar is not immediately evident. This is why people stick with their
dollars for years, as they lose 80% or 90% of their value, before they catch
on to what's going on.
It's
possible that the dollar will lose quite a lot of value over the next 4-7
years. This would be evident in a "rising gold price." At $10,000
per oz. of gold, the dollar would be worth only 10% of its value today. It would
take ten times as many dollars to buy an ounce of gold.
That
is about the point at which I think most mainstream people will finally wake
up to what's going on. Unfortunately for them, by that point, they're already
dead. It's too late.
Now do
you understand why people own gold?
Nathan
Lewis
Nathan
Lewis was formerly the chief international economist of a leading economic
forecasting firm. He now works in asset management. Lewis has written for the
Financial Times, the Wall Street Journal Asia, the Japan Times, Pravda, and
other publications. He has appeared on financial television in the United
States, Japan, and the Middle East. About the Book: Gold: The Once and Future
Money (Wiley, 2007, ISBN: 978-0-470-04766-8, $27.95) is available at
bookstores nationwide, from all major online booksellers, and direct from the
publisher at www.wileyfinance.com or 800-225-5945. In Canada, call
800-567-4797.
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