Wednesday, May 10, 2006

Why Gold Isn't Just Another Bubble

Well, actually it is, to some extent. In other words, the central banks of the world have de-standardized the monetary units of their respective countries by taking them off the gold standard back in the 70's. But as I've said before and I'll say again, you can take gold out of the standard, but you can't take the standard out of gold.

Now, any solid asset tends to find its real value in a free market, vacillating up and down with the flow of speculative liquidity. After all, real estate, for example, tends to keep its "value" in the sense of "purchasing power," over the years, in spite of the bubbly ups and downs. (But remember, it's got a lot of expenses tied to it, like taxes and upkeep, that must be kept in mind when considering it as a store of value. And you can't always sell it at the right moment, so speculation is difficult.)

The stock market also tends to keep pace with inflation, when you think about it. In fact, over time, the price of any asset does tend to find its level, no matter what nonsense goes on with the measuring stick that is the monetary unit of a country. (And much nonsense there is, but I've discussed that in my earliest posts. Go back to the archives and read through chronologically, starting here, at the bottom of the March 2005 archive link.)

And gold and silver both walk and talk a lot like bubbles. Theodore Butler over at silverseek.com has written some interesting allegations about speculation in gold and silver, notably how Buffett may have lost his silver spurs in the derivatives market, and how Barrick may have fudged some accounting. So it's true, gold and silver both can look like just another bubble.


[Thanks to art-bazaar.com for the photo.]

But believe me, there is only one element in this world that can stand up with pride and be called money and a great store of value, and that is gold. (Why? Read my archives.) Yes, gold will go up, and gold will come down, but the mean value of gold is what I consider to be the truest measure against which we can compare all of the inflated monetary units of this world.

What is that mean value today? Some experts put it at $600. Some put it as high as $1,000, or more. I will say that it depends on the market, and we will see within the next few years, after all of this hysteria is finished doing its havoc.

If you ask me, gold should find it's rightful place back at the center of global monetary policy. The only reason it fluctuates so wildly today is that it is sitting on the fence. The market loves it as a hedge against inflation, but the central governments refuse to recognize this intrinsic role of gold in any official capacity.

I would love to see our governments take up where they left off and permit the use of a metric account unit of gold in all transactions, especially international ones. It would save us a lot of grief all the way around, and it's feasible. Perhaps it could even be done already; all we need is some courageous global players to start the ball rolling.

But who's listening to me? And anyway, treasury politics, big hot paper money, and gold as a monetary unit don't mix.

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