Tuesday, August 28, 2012
Dr. David Evans
Gold is monetary, and is valuable because it is money. It is not a commodity like wheat, because it does not get used up. Nor is gold an investment that produces goods and services; it is just a medium of exchange, like cash. Gold becomes a good investment only when the other currencies are failing, inflating and debasing. This is one of those times.
Evans examines the best case for the central banks and official sector, where they stay in control of the system and successfully guide it through a period of financial repression. He estimate how long that needs to be, and why. Of course, he writes, much could go wrong along the way.
He discusses manufacturing money (“…base money is created by the central bank, and bank money is created by the commercial banks. Historically, any money system where money can be created from nothing is unstable because it eventually gets much debased—and they tend to last on average about 50 years. Each part of our current system is unstable in its own right, and the current system is just 41 years old. What could possibly go wrong?”); America’s debt crisis; what’s next; why politicians will choose inflation; a forecast to 2028; and gold.
Gold enforces honesty, because you have to earn it before you can spend it. No one can conjure it up for little effort, and even mining it can take as much effort as it’s worth. In particular, banks and government cannot print it.
The monetary elite and governments don’t like gold; they prefer their dishonest money. They enjoy the first use of the new money, spending it before it pushes up prices. Governments can print to cover their debts if necessary. For centuries the greatest game in banking has been to buy assets in a sector, approve more lending for purchases in that sector, then sell their assets when the prices subsequently rise, then cut off lending into the sector and watch the prices fall.
Some say gold is in a bubble. Not so. Gold goes up forever against paper currencies, at an average rate equal to the difference in their rates of debasement. A gold price of $1 million per ounce is only a matter of time—but will it take 50 years or 500 years?
By historical standards, the gold price is low. The total amount of debt in the world in 2011 was around $210 trillion, and the world’s GDP was $60 trillion. Yet the value of all the gold ever mined is just $9 trillion. If gold ever re-enters the official financial system, it will have to move up in value quite considerably.
The last gold price rise was 1968—1980, when it rose from $35 to $800 per ounce. Interest rates around 20%, which made paper currencies attractive and stopped their debasement, stopped its rise then. Today nobody can afford to pay 20% interest rates, especially governments, so gold is going to keep trending up for quite a while
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