Wall street and most financial firms are experts on selling the sizzle and not the steak. That is why we use the words “Bull Market” because wall street is expert at selling BS. We call “Bear Markets” that because that is when people are reduced to running around bare naked having lost all their assets in a stock market collapse. The same is true of the Swiss Gold Gnomes. When Gold is at an outlandishly high price over the cost of producing it they are eager to sell as much as they can and instead of selling the sizzle they sell the glitter and not the gold. They offer you this great deal to buy gold and put it back into their vaults for safe keeping or they find a mint to stamp on a coin a fancy pretty picture, print up a certificate of authenticity and sell the coin at a premium to the spot market price. It is very easy to get conned into buying Gold at a significant mark up over it’s intrinsic value which is the lowest cost possible to find it , mine it, process it and transport it to the market. After that there are costs of storing it. Believe it or not gold owners get charged rent to store gold in someone Else’s vaults. Security is necessarily involved. In a market where gold exceeds it’s production cost on the open market by more than a 100% mark up over production costs by the most efficient producers most buyers get all glitter and no real gold. It is not fools gold but it does lead to a fool with gold.
Right now a lot of gold bugs are as loudly as possible trying to seduce governments to go back a gold standard backing for our unfortunately over printed national currencies as an international payment and reserve system that President Richard Nixon put a stop to. Governments are easily seduced by the lure of Gold. It is a historic fact. Gold was an excellent store of wealth for most of human history and independently developed into that in diverse distant cultures. Gold was a medium for exchange independently in China, in the Middle East, in Ancient Latin America and that is pretty fascinating but it is not the whole story of Gold nor of its problematic aspects.
We get words like debasing money and inflation and deflation in the economy not from paper dollar economies but from gold money economies as it happens. The world was not immune from gold being diluted or debased with base metal by unscrupulous dealers and governments for most of its history. If you ever wondered why gold and silver coins are relatively rare from ancient times it is because gold was continuously recycled, bronze, copper and brass coins are more predominant as surviving because they were much less likely to be melted down and recycled in different political eras. Gold was as subject to the pressures of inflation and deflation as paper dollars are today. Paper dollars money can be hyper inflated in ways that gold cannot but it does not happen very often as the mint printing presses do realize that the destroy their own game by going to far with print capacity. There is game logic involved. Governments universally will tend to produce the maximum amount of currency for their own use in making purchases without causing prices to rise faster than they are able to spend it. That is sort of a rule of thumb. The inflation only shows up in the economy after government spends money until they create an environment of expectations that reverberates though the economy causing a maximum amount of destruction for anyone holding dollars for a long enough period of time for the inflation to fully register though out the economy as higher prices.
When Cortez first met Montezuma on the outskirts of Mexico City around the year 1500. Cortez was surprised that the idiotic Indians came to meet him bearing gifts made of heavy solid gold. It was idiotic for the Indians and Montezuma because it sealed their fate. The Spanish were not the gods worthy of the offering that Montezuma brought but devilish creatures that lived to lust for gold. It was the biggest mistake in all of world history showing Cortez the gold and offering him a sample. When Cortez saw the gold nothing else mattered to him and it was only a few years later that ancient Mexico city was reduced to ruins and Montezuma and his civilization were destroyed with the gold completely stripped away from and sent to Spain.
Spain quickly became the richest country on earth , not just in Europe. Gold was instant easy credit when it hit the shores of Europe soon there was a spectacular gold inflation in Europe and the overall trend for higher prices lasted some 300 -400 (for Europe not just Spain) years with intermittent deflationary dips in Europe’s economy. Over all one might say the gold was good for Europe. British Pirates were grabbing a fair share of Spanish gold on high seas raids so the inflation even took of in Britain. periodic price deflation recessions occurred in Europe with prices falling as much as 50% but the over all trend was inflation. Gold did not save the Spanish from being overtaken eventually by the British Empire. The idea that Gold is the savior is good and suspect as plenty of empires with gold standards met nasty financial ends with no paper money at all involved in their economic collapses. The cliché’ that gold is just an antique primitive lusting for glitz is pretty accurate . Latin American Gold did play a major role in the development of Europe into an economic powerhouse but only as medium of exchange because the inflation trend it took had many of the characteristics of paper money. Settling debts with gold transfers created the same sort of situations that leads to the printing of certificates for gold in lieu of gold as only the smartest of bankers were able to convince European governments to keep their gold deposits in the same bank that other governments were going to deposit to. That was the genius of The Rothschild family. They managed to get their cake and eat it too by having European governments transfer the gold from one of their national banks to another without physically having to move the gold much of the time. If they did have to part with the gold it would soon after be re-deposited in yet another country branch of the bank of Rothschild with certificates being issued in lieu of holding it. The Rothschild financial empire was the real central bank of Europe before they had systems similar to our own federal reserve. It was a private pan European and world central bank. Unlike governments, the bank of Rothschild did not put themselves into a position to be in default of loans owing gold much of the time. Gold really was not much more perfect as a medium of exchange than paper money is and it was always a lot less convenient to move around and distribute.
The attempts of gold bugs to seduce people into buying at high prices and to even try seducing governments into building up larger gold reserves is fascinating. One of the best gold bugs is to watch is Mark Faber who has the website, http://www.boomgloomdoom.com he is often a visitor on Blomberg financial television telling his audience to buy gold and gold mining stocks. He tells people they should keep their gold overseas for protection presumably of the US government moving to confiscate all the gold it can soon from our own citizens. The suggestion really is that you buy his gold and put it in his bank for safe keeping. That is the good old system and definitely seems like he is selling more glitter than gold as I discussed above. If you have gold on deposit in his swiss bank, off shore and over seas you maybe at risk of a us federal crime of one sort or another sooner or later , the price goes up and you want to sell your gold his bank will offer you a prices lower than spot or just tack on an additional commission fee to sell. If the price falls you can sell your gold to the bank it is store in at the market discount less the commission to sell. It is a great deal for the bank selling gold that way and then “managing it for you.” it is exactly the same sort of system that mutual funds have where regardless of how much money they make or loose for the investors they get to keep the percentage they get paid the defined percentage. In addition the bank may charge storage fees.
I rather believe that the US government prove foolish enough to attempt to go back to a gold standard using the excuse that it is the way to prevent the temptation to print too much money. That is nonsense because Governments print gold certificates just the same way on paper when it comes to trying to hold the gold in reserve and pay for things at the same time. If you owed your income taxes in gold, it would pay for the us government to make tokens out of it and send you tokens on condition that you would have to pay taxes with them and not other assets . By the time that starts it becomes cheaper just to print a derivative certificate the same way a swiss gold bank will. Who would not rather have the gold instead of paper? but if you are going to send General motors a 25 billion dollar bail out payment in gold it is something like 1.5 million lbs of Gold and that takes lots of diesel fuel and lots of train cars to get to general motors and then a big safe place to store it. Paper makes more sense because GM will just deposit it in a local bank in Detroit or Chicago or new York and then need to make payments to workers and suppliers by carving up the gold bars and making tokens. That becomes a lot more complicated than just admiring the glitter as a virtue.
The final flaw in Gold is that gold maybe money but it is also diesel fuel and coal in disguise. The main input costs to mining, processing , transporting gold happen to be fuel and energy costs. That is one interesting reason now that oil prices are falling that gold is a worse investment because the cost to mining producers goes down when oil prices fall! Gold is not necessarily an anachronism in our modern world but it is much more glitter than real value as advertised. theoretically it is better than printed paper money for an objective store of value but it instantly becomes paper money and is debased as paper money once it goes into reserve storage. It even carries holding costs due to security that can exceed the cost of printing paper money.
Backing up the US dollar, my favorite currency , is absolutely necessary but gold is probably a mistake to use alone for that purpose because it creates an international competition for the most foolish of glittering gullibility. The United States has assets that far exceed the value of all the Gold it is ever likely to acquire by any means and that is what it should look toward to stop the devaluation before it happens. Some of us theorize that the present financial collapse is not because of bad real estate loans but because the government created the conditions for loans that never should have been made and then decided it would be a good time to devalue the US dollar against the Euro and , the Yen and Yuan, Not content to stop there they devalued the dollar against the rupee , the rubble , the pesos and even the Canadian dollar. This seems to be the real reason the financial system collapsed because the US ran foreign investors and their capital out of our markets by lowering the value of their stored trade credits held in US dollar dominations. The best way to stop the collapse if for the US to agree to make acceptable payments of something of value the creditors will settle for instead of trying to shaft them with games and to liquidate real collateral as if it is full value collateral even if that takes a couple of years What they are doing , unfortunately is spreading out the harm instead of a wholesale liquidation. the US needs the foreign investors to come in and buy up slack in the deflationary climate not to chase them away.