A Valuable Thing to Store
by Gary North: Booms,
Busts, and Food Prices
Gold is a
valuable thing to store. However, it is not a store of value.
Gold has intrinsic
properties that make it valuable. However, it does not have intrinsic
I mention this,
because, at some point, you will read about gold as a store of value.
You will read of gold's intrinsic value. Every time you read either
of these phrases, you will know that the author does not understand
The price of gold has moved above $1400 an ounce in recent days,
up from the low $1300's. Presumably, this has been in response to
the turmoil in Libya, which has reduced the immediate supply of
oil. The rising price of gold indicates the possibility of continuing
turmoil in the Arab world.
in the price of gold indicate that immediate changes in external
circumstances can affect the price of gold. There has been an unexpected
increase in the demand for gold.
all schools of economics except for the Marxists, the prices of
goods and services rise and fall in terms of changes in the markets,
which include consumers' tastes, monetary changes, changes in supply,
changes in the price of alternatives, and changes in the public's
expectations of future prices. There is therefore no fixed measure
is subjective. It is imputed. Buyers compete against buyers; sellers
compete against sellers; and people's assessments of future conditions
are always changing.
drive prices up or down. People have subjective assessments of the
objective future. They also have expectations regarding other people's
subjective assessments of the future. Through competitive bidding,
people establish objective prices in various markets.
fact to understand here is that objective prices are the result
of competitive bids by people with subjective assessments of the
future: immediate and more distant assessments.
IS NOT A STANDARD OF VALUE
There is a
widespread mistake in economic analysis within those circles that
are called the hard-money camp. People are under the impression
that gold is a standard of economic value. This concept is foreign
to economic theory.
Yes, we speak
this way. The Bible says that a virtuous woman is worth more than
rubies (Proverbs 31:10). But it does not say exactly how much more
valuable than rubies she is. It does not offer a formula. There
is no good virtuous-woman-to-rubies ratio that is normal. The price
of a virtuous woman on a free market does not fluctuate around this
To make this
clear, consider the fact that the price of oil can rise without
an accompanying rise in the price of gold. There is a tendency for
the two to rise and fall together, but this is only a tendency.
No one is sure why this tendency exists. It may be that both of
them move in expectations of rising price inflation. But consumer
prices have barely budged since 2007, yet the price of oil was extremely
volatile in 2008 far more so than gold's price.
We read that
the price of gold has not changed. Only the price of the dollar
has changed. Again, this is obvious nonsense. The price of gold
went over $1,000 in March 2008, only to fall to about $750 five
months later. Yet consumer prices did not change.
here ought to be that gold is not a measure of value. Then what
is? Nothing is, any more than there is a measure for the value of
a virtuous woman.
impute value. They think something is valuable to them at this moment.
This can change, moment to moment. People are constantly changing
their assessments of what items or services are worth to them.
There is a
story in the Bible of Esau and Jacob. Esau was hungry. Jacob offered
him a meal of stew in exchange for Esau's birthright as the eldest
son. Esau decided that this was a reasonable exchange (Genesis 25:34).
We think this was a foolish exchange, but Esau had a different assessment.
His hierarchy of values was present-oriented. He discounted the
value of a distant birthright.
have very different assessments of the future. The average American
owns no gold. He does not know where to buy gold coins. He probably
has no awareness that the United States Mint produces bullion gold
coins. He surely has no knowledge of the fact that the Mint did
not do this until after Ron Paul persuaded President Reagan's gold
commission in 1981 to ask Congress to pass this legislation in 1985.
Yet we read about the price of gold in the financial press.
The fact that
the average American owns no gold indicates that the average American
does not assess the future in the same way that the average gold
bug does. The typical buyer of a gold ETF or other gold fund is
not thinking the way that the average American does.
Gold is not
a standard of value. It moves up or down in terms of individuals'
competing assessment of its prospects in a world of fiat money.
The general public thinks of their national currency unit as a standard
of value, but it isn't. That is not because fiat money is uniquely
a fiat economic standard. All standards are fiat. We say "let it
be," and then either buy, sell, or do nothing. It is the composite
bids of those people who actually buy and sell that establish the
price of any asset. There is no earthly source of composite value.
There are only objective bids.
of the weight and fineness of a gold coin do exist. These measures
establish the degree to which a coin deviates from this standard.
They enable us to determine whether a coin is a counterfeit. But
they do not tell us what gold is worth. Only the free market does
intrinsic physical qualities. It is extremely durable. It is malleable.
It has a certain luster. All of this in combination has made gold
a popular investment tool down through the ages. But there is no
intrinsic value to gold. Value is not intrinsic. It is imputed.
speak of gold's intrinsic value when they mean historic value. Gold
has generally held its price down through the ages. This price has
varied. Gold fell from over $800 per ounce ($2,100 in today's purchasing
power) in January 1980 to just over $250 in 2001. Then it rose to
an ounce of gold has bought varying quantities of goods and services
of varying value. The heir of someone who bought an ounce of gold
with his labor in the era of Jesus could take that ounce of gold
and buy goods and services today. But there are very few services
that have remained the same, other than the world's oldest service
industry. The amount of bread that the heir can buy would be considerable,
due to the enormous increase of agricultural production. The tools
of production that a person would have bought in Jesus' day barely
exist today. If they still exist, the Amish buy them.
gold unique is this: a person can buy something of considerable
value with an ounce of gold. He could buy almost nothing today with
a tool of production or even a high-quality consumer good in Jesus'
day. The range of goods in Jesus' day was limited, though not much
less limited than in 1750.
There is great
confusion regarding the value of gold through time, not because
gold has changed but because everything else has. There is a market
for gold all over the world. There is no market for the things gold
would have bought 50 years ago, except as items for the "Antiques
that the price in gold of a fine automobile in 1925 would be about
the same today. But the concept of "fine automobile" has changed
radically. What is astounding is that a common metal coin that does
not change through time can purchase anything of value in the future.
This is gold's
great benefit: its continuity of value over time. People will still
impute value to gold in a century. There are very few investment
assets that will surely maintain a comparable value over the same
of mass production gets better over time except gold. Yet gold,
by not changing at all, maintains value through time.
We should not
confuse this with intrinsic value. We should understand it in terms
of intrinsic physical qualities. Gold's most important attribute
is its high imputed value in relation to its weight. It is expensive
POLICIES, GOOD GOLD
of value is of great service to someone who is concerned about looming
disruptions due to government policies and central bank policies.
If gold muddles through as an investment asset, then it becomes
a sought-after investment when the general public at last figures
out the government promises will not muddle through.
It is not that
people can get rich with gold. It is that they are less likely to
of gold's value through time is in contrast with the stability of
government promises, especially concerning the stability of the
national currency unit.
lie. Gold muddles through. Central bankers make grandiose promises.
Gold muddles through. Economists make grand claims about the ability
of economic forecasting tools to bring stability to the economy.
Gold muddles through.
cycle makes and breaks investment plans. Gold muddles through. The
structure of personal and corporate debt changes over time, bringing
to ruin people's plans. Gold muddles through.
for success in terms of their plans for the future. When those plans
hit the brick wall of uncertainty, the plans may die. Gold muddles
father in India buys gold for his daughter's dowry, just as his
father did, and his grandfather did, stretching back through time
to before the Bank of England. A gold necklace worn by some lovely
young bride in 1500 will look just as good on a bride today.
Think of a
bride wearing Federal Reserve Notes. This image just doesn't have
the same sense of permanence.
farmer in India may not be able to read, but he will buy gold for
his daughter in confidence that a piece of gold is worth more than
all the collected assurances of stability issued by all of the Federal
investor trusts the promises of politicians, who he knows lie for
a living. He trusts the assurances of a Federal Reserve Board Chairman,
when he knows that the same man did not see the crash of 2008-9
Who shows greater
wisdom: the simple farmer in India or the hot-shot money manager
on Wall Street?
Gold is not
for hot-shot investors. It is for simple people who know enough
not to trust the promises of politicians and the assurances of Federal
Reserve Board Chairmen.
Gold is a lasting
testimony to the lies of politicians. They stand in front of the
cameras and tell the voters that things will be just fine one of
these days. Real soon now. The voters dream of golden years in retirement.
Lucy. The voters are Charlie Brown. The Social Security system is
a football. We know what is going to happen. Charlie knows what
is going to happen. It will happen.
Gold is for
the skeptical investor who says, "She's going to pull the ball away.
I will not kick it." He sits on the sidelines, amused at the gullibility
of Charlie, year after year.
treat the voters just as good-looking men with no visible means
of support treat ugly rich heiresses. They tell them what they want
to hear. The voters believe, just as ugly rich heiresses believe.
Gold is a barbarous relic. That was the assessment of the slickest
talking economist of the twentieth century: John Maynard Keynes.
He sold himself to the British government in his capacity as a Treasury
official. He told the young economists of his day what they wanted
to hear: that their predecessors were old fogies, that gold is a
barbarous relic, and that the world would be a better place if it
allowed governments to run deficits and central banks to create
money without the fear of a run on their gold by barbaric simpletons.
bought it. The politicians bought it. The central bankers bought
farmer in India never heard of it. If he had, he would have bought
even more of the relic if he could have afforded it. Trust a British
official? "Another gold sovereign, please."
his early years in the British Civil Service working on India's
affairs. He did not persuade Indian farmers. They did not persuade
there is a great granddaughter of some Indian farmer of Keynes's
day who has a necklace with a few British gold sovereigns that her
great grandmother wore to her wedding back when Keynes was forming
his ideas on monetary theory.
When it comes
to believing Keynes or Patel, I'll stick with Patel . . . as long
as he is not a graduate of Cambridge.
Gold is a valuable
thing to store. Believe this with the trust of an Indian farmer.
Don't pay attention to a self-educated gold promoter who tells you
that gold is a store of value or has intrinsic value.
the logic of gold before you buy it. The logic of gold is that,
fifty years from now, someone will buy that gold with something
does not believe this. That's another reason to buy gold.
North [send him mail]
is the author of Mises
on Money. Visit http://www.garynorth.com.
He is also the author of a free 20-volume series, An
Economic Commentary on the Bible.
2011 Gary North
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