Gold And Sound Money

Sometimes I am predisposed to think that gold may be in a bubble, even if I know it isn’t.

This happens when I get feedback of gold’s alleged immutable role as a wealth preservation asset especially in the supposed prospects of an ‘Armageddon’ of either the US dollar or the US economy.

Chart from Casey Research

I don’t know whether gold’s successive rise maybe instilling a false sense of security or may be leading some people to become proselytes or cult followers of the ‘gold bug’ dogma.

However, given that the reactions I get seemingly emanate from false premises, or from the idea that gold functions as an anti-US dollar trade, where in fact gold has been rising against ALL currencies, I think it is more about the former.

In addition, when one becomes an idealist who aspires to share of gold’s ‘wealth preservation’ status as a social mission, it would seem as wrong source of advocacy.

For one, it represents a false belief to think that gold prices as only moving in one direction enough for it to function as an enduring ‘wealth preservation’ asset.

While it is true that gold has functioned as money over many generations, gold has likewise shown periods of volatility as shown by the 650 year chart courtesy of chartrus.com or sharelynx.

In other words, gold like all other commodities is subject to the forces of demand and supply.

The main difference with gold from other commodities is that gold and the precious metal family has demonstrated special qualities (marketability, divisibility, durability, scarcity, high value per unit weight, homogeneity and a stable supply) that have made people reconsider them to discharge of an additional role-money.

Second, the rejuvenated price of gold has mostly occurred after the Nixon Shock or the closing of the gold window in August 15, 1975 that has transitioned the monetary framework from that Bretton Woods gold-US dollar convertibility to the US dollar standard.

Chart courtesy of Wiltontech

The implication is that with the current monetary platform unanchored to commodities, global central bankers and their respective political authorities have been free to inflate on their currencies to meet many unsustainable political agenda. And the repercussions of these actions appear to be coming home to roost.

Thus, the rising prices of gold, not exclusively to the US dollar, could most likely be symptomatic of the escalation of these ongoing inflationist maladies around the world.

And a continuity of gold’s rise would only suggest of further stress in the current US dollar centric fiat standard.

Put differently, rising gold prices may be pointing to a prospective inclusion of gold in the reconfiguration or reform of the incumbent currency architecture. World Bank’s Robert Zoellig recent overtures may be interpreted as a gradual warming of authorities on such a possibility.

The fact that current conditions have been prompting changes to peoples perception of gold, which includes political entities, implies that the gold’s current price trend could reverse once inflationism would be recognized as the source of economic and financial ailments and subsequently addressed.

While the odds of this may be slim for the moment, worsening inflation conditions or the public’s sudden recognition of the inflation tax, may radically alter this mentality.

The point is, it would be wrong to view gold prices as perpetually headed skywards because people act and react based on the unfolding conditions. And the same applies with government policies, policymakers respond to changes in political conditions or sentiment especially when their privileges are under threat.

In short, past performance may not be indicative of future results.

As caveat, this is NOT to say that I have changed my stance on gold as I remain steeply bullish.

The lesson I want to impart is that no asset can be seen as static or even permanently risk free.

Lastly, it would be wrong to worship gold as if contains some mythical powers or deified like the Biblical idol, the golden calf.

The value of gold represents what society perceives it to be.

And if there is anything that gold has symbolized in the past, it is no less than sound money on the framework of economic freedom.

As Ludwig von Mises explained,

It is impossible to grasp the meaning of the idea of sound money if one does not realize that it was devised as an instrument for the protection of civil liberties against despotic inroads on the part of governments. Ideologically it belongs in the same class with political constitutions and bills of rights. The demand for constitutional guarantees and for bills of rights was a reaction against arbitrary rule and the nonobservance of old customs by kings. The postulate of sound money was first brought up as a response to the princely practice of debasing the coinage. It was later carefully elaborated and perfected in the age which — through the experience of the American continental currency, the paper money of the French Revolution and the British restriction period — had learned what a government can do to a nation's currency system...

Thus the sound-money principle has two aspects. It is affirmative in approving the market's choice of a commonly used medium of exchange. It is negative in obstructing the government's propensity to meddle with the currency system.

So any advocacy should center not on the metal itself but on the essence of what gold truly stands for-Liberty and Economic Freedom.