Why Gold Is Money
Most people believe that gold is simply a commodity. The truth, however, is that gold is money.
Good money is easily divisible into standardized units; easily recognizable and verifiable; has a high value density; is difficult to replicate/forge; is easy to transport; is durable and almost indestructible. As well, the existing supply must be small relative to new annual supply so as to avoid rapid dilution/ debasement.
There are plenty of items that satisfy some of these criteria, but only gold (and silver) satisfy all of them.
Money must perform three primary roles: It must act as a medium of exchange to facilitate trade. It must serve as a unit of account (a standard monetary unit that enables the measurement of the value/cost of goods, services, or assets), and it must provide a store of value or wealth.
When gold’s vital role as a store of value (wealth) is understood in the context of the true definition of inflation, we can see that today’s fiat (paper) money is not “good money,” as it does not provide a store of value.
Today’s paper currency isn’t good money because, thanks to profligate governments and central bankers, it does not provide a store of value. In contrast, thanks to its limited supply, gold has a long history of preserving wealth and that is why central banks around the world hold so much gold (around 31,490 tonnes), and why they are adding to their holdings.
People are beginning to realize that today’s fiat currency is flawed, its value continually debased by central bankers via their inflationary monetary policies. As a result investors are turning to real money—gold. Over the past 9 years, gold purchases for investment purposes have increased by 366%.
Gold is reclaiming its rightful role as money, and although it may be years before it is once again part of the official monetary system, there can be little doubt that that is where we are heading.
Fade Goldman’s Bearish Gold Call
The latest research note on gold from investment bank Goldman Sachs—in which they see the gold bull market coming to an end in the months ahead—might be taken more seriously if not for two factors:
First, the call is based on a vastly improved US economy next year that leads to higher real interest rates, but Goldman hasn’t been terribly accurate in their economic forecasts, and the firm has a reputation for telling investors to do one thing and then betting against it, as many (some in Congress) believe was the case with subprime mortgages as the housing bubble peaked.
Second, in order for real rates to rise, either interest rates must go up (something the Fed has promised will not happen) or inflation must fall sharply (something that would prompt more money printing). The Fed is determined to spur economic growth and keep monetary policy loose until the recovery has taken firm hold.
As for the forecast for heady economic growth, it's worth noting that Goldman Chief Economist Jan Hatzius has had a run of bad luck lately, predicting big things and then having to reverse course later on.
Gold and Silver the “Go-To” Asset for Capital Preservation
Williams discusses Paul Mylchreest’s latest Executive Summary, “Inflationary Deflation: Creating a New Bubble in Money.” Mylchreest examined the way excessive monetary stimulus coupled with low interest rates creates financial bubbles; he believes that central banks are now creating the ultimate bubble – in money – in an attempt to counter the downleg in the most recent Long Wave cycle.
Mylchreest says physical gold is the only financial asset with no counterparty risk and a track record of several thousand years as a store of wealth par excellence. Furthermore, gold is the only asset that outperforms during both inflation and deflation, and he reckons we are seeing a battle to the death in these opposing forces.
While potential gold investors may feel they have missed the boat, Mylchreest thinks the gold price will reflect the reciprocal of the purchasing power of existing currencies and that these are being debased at an ever-increasing rate. He discusses gold’s increased demand as the price rises rather than the reverse, with ETF holdings at an all-time high and central banks becoming buyers rather than sellers. He also notes that China is at the forefront of gold purchasing despite not reporting such changes in its official reserve figures.
Mylchreest also discusses the inevitability of a new global reserve currency replacing the US dollar. China is taking the role of France, which effectively brought down the old Bretton Woods agreement through its distrust of the dollar. Key Chinese figures have noted their dissatisfaction with US monetary policy and the country is thought to be stockpiling gold to give it a better negotiating position when choosing a future reserve currency.