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Thursday, September 22, 2011

The Assumption With Gold

The underlying assumption when people say gold is the ultimate store of wealth is that there will always be a market infrastructure in which we can exchange the gold for other things (nutrients, potable water, cell phone chargers, etc.).

Perhaps this assumption is always why I've found discussing the issue with goldbugs so exasperating. A miscommunications about scenario parameters. The term "economic collapse" to them means fiat currency lowering in value so other people eat generic-label cereal while they get to buy Ferraris by trading for a few bracelets. Whereas to me the term "economic collapse" means that there is no food to buy at any price (or medium of exchange), and no gas for Ferraris at any price (or medium of exchange).

In a way, goldbugs are more optimistic about social stability in the future. It just seems to me that in past crises, the planet had a low human population and abundant resources. The peasant farmers may have been poor in terms of cool stuff (silks and toys), but the basics (food and water) were still obtainable. So a stable, tolerable poverty. The planet is at a point now where if the infrastructure fails due to an economic collapse, the basics aren't going to be obtainable. So social instability on a scale never before imagined.

In summary, I now feel a sense of peace with my gold-loving brothers. A miscommunication in perception. They believe in a market after dollar death whereas I am an eternal skeptic. Like with my religious friends who believe in life after death, I disagree but am open to pleasant surprise and will be very happy to be wrong.

4 comments:

JP said...

They're just thinking of gold as a form of money that can't be debased.

In this sense, they are probably right.

If they think they are going to "get rich", they are probably wrong.

See today's market action in gold for further details.

I think that your point is that "you can't eat gold".

Edwardo said...

The underlying assumption when people say gold is the ultimate store of wealth is that there will always be a market infrastructure in which we can exchange the gold for other things (nutrients, potable water, cell phone chargers, etc.).

-No one who thinks of gold as a store of value would confuse that function with the medium of exchange function which is what you are referring to when you write "exchange the gold for other things"

Perhaps this assumption is always why I've found discussing the issue with goldbugs so exasperating.

-No offense, but your fundamental misunderstanding about gold's role in monetary affairs is, from where I sit, at least as exasperating.

A miscommunications about scenario parameters. The term "economic collapse" to them means fiat currency lowering in value so other people eat generic-label cereal while they get to buy Ferraris by trading for a few bracelets.

-It about fiat finally assuming it's sole role which is as a mechanism to avoid barter and nothing more.

Whereas to me the term "economic collapse" means that there is no food to buy at any price (or medium of exchange), and no gas for Ferraris at any price (or medium of exchange).

-What is occurring globally, but particularly in the west, is the result of generations of conflating the store of value function of money with its medium of exchange function. We aren't seeing economic collapse so much as seeing some forty odd years of funny money fueled asset inflation and public spending revert to the mean, and/or perhaps below the mean.

Dink said...

@ JP

"I think that your point is that "you can't eat gold"."

Sort of. I remember some econ prof using the term "cetera parabis" which means "everything else remaining the same". So you adjust the interest rate or some other variable in an equation to see what happens, but ignore all the real-life consequences so you can better visualize a comparison of apples to apples. But it bugged me to no end. No variable is an island, etc. So, in summary, if the econ infrastructure ever gets to a point where gold is involved, we're going to have a boatload of problems that will overshadow all else.

@ Edwardo

"your fundamental misunderstanding about gold's role in monetary affairs is, from where I sit, at least as exasperating."

I truly believe that you are exasperated with me. Please believe that I am making a good-faith effort to understand and bridge the gap. Picture me asking as a curious 5 year old instead of an opposing adult trying to bait you.

"No one who thinks of gold as a store of value would confuse that function with the medium of exchange function"

But isn't a store of value just an item being saved so that it can be turned into exchangable currency units at somepoint in the future (to then purchase food or yachts)?

If I get the drift correctly, now we store gold instead of exchanging it in for dollars. If a new fiat currency/medium of exchange comes around, goldbugs figure they'll get more units of the new currency using gold instead of dollars. And I can follow this logic.

"We aren't seeing economic collapse so much as seeing some forty odd years of funny money fueled asset inflation and public spending revert to the mean, and/or perhaps below the mean."

But, but, but... (Okay, I feel this must be worded correctly since it may be at the heart of our disconnect).

Going back to 1971 presents some challenges. The planet had less people and more resources. The "funny money" debt and "funny energy" hydrocarbon stores allowed us to reproduce in excess. And build an infrastructure for food growth and distribution that is too complex to scale down.

So living within our true means (as we are hypothetically supposing we did in 1970) is impossible. Even if 3 billion people were magically whisked off to a new planet, we'd have to get local farms online and find some other way to power trains and trucks to deliver medical equipment.

So I guess this is why I say goldbugs are more optimistic than I. I can't see how we can revert to living within our means without some sort of Mad Max era in which gold won't matter and they can.

Edwardo said...

"But isn't a store of value just an item being saved so that it can be turned into exchangable currency units at somepoint in the future (to then purchase food or yachts)?"

Gold has proven its ability to store wealth, i.e. storing one's excess profit's purchasing power through time. That is the very definition of a store of value. The evidence for gold's efficacy in this regard is overwhelming except to those whose minds are closed. The fact that gold may be converted to some medium of exchange in order to purchase a yacht is irrelevant.

Truly, you appear to be a peak everything doomer which is your right. But, it's one of the most arrogant positions one can assume since it posits the ability to say with some degree of certainty that we have reached the bitter end of resource extraction and/or technological advances that would mitigate putative limits on presently available resources.

Your position is akin to that of Einstein who once said, "God doesn't play dice." Max Planck rightly responded, "Mr. Einstein presumes to know the mind of god." Consider that what you think you know may be unknowable. But, yes, if it's all going to the sort of seed you imagine then gold probably won't maintain its several thousand year track record of storing wealth.

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