THE GOLD-PRICE IS IRRELEVANT
What really matters is not the fiat-price of
gold, but the gold price of fiat.
Gold is always valuable because
it combines in itself many use-functions. Nothing else in
this world can replace it, and therefore nothing can ultimately
displace it. Gold is independent of all of the
ups and downs, the fads, the booms and the busts of the collective
human psyche. It's just there. And it's always useful.
Paper-money, on the other hand, is extremely
It is dependent on the "faith" of
the masses who use it that it will buy about the same thing
tomorrow as it buys today. It is therefore dependent on the
continued ability of those who issue it to instill that faith
in the masses.
On top of that, it's use-function is rather
limited. When it comes right down to it, fiat has only one
intended use-function (money), and a couple of unintended
ones (heating fuel, wallpaper, and bathroom tissue).
Needless to say that it fulfills neither of
these (intended or unintended) use-functions very well. Gold,
on the other hand, fulfills virtually all of its use-functions
simultaneously in a most admirable way.
There is only one problem: People are gullible.
We are only too easily fooled about what has
true value and what doesn't. And our experience with paper
money proves that point beyond a reasonable doubt.
But the thirty year-plus success story of pure
fiat money - against all expectations, and defiance of economic
doctrines telling us of the calamities that befall any society
that favors fiat money - have introduced a dynamic into the
theory of money that simply cannot be denied, and that new
dynamic is that.
People Demand Fiat
There's just no two ways about it.
Since any thing's value always depends on its
usefulness to us as individuals and groups, and since fiat
is in such demand, there must be at least one of the three
functions of money (as a unit of account, medium of exchange,
and store of value) that fiat performs exceedingly well, or
the demand simply would not exist.
Certainly, deception, propaganda, force, and
manipulation - and our willingness to be deceived as long
as we see an advantage in it (or as long as it's convenient
for us) - have all plaid a role in the establishment of fiat
as "the" medium of exchange used by all people around
the entire world. However, it would be dishonest to simply
claim that these are the only elements that made fiat's long-term
Beyond the fact that rulers prefer fiat because
they can control its rate of issuance, there appears to be
some function that fiat obviously fulfills better than gold
or silver, or at least as well. That function is its dual
function as a "unit of account " and as a "medium
of exchange." In short, it is its function as "currency."
It is here where those of us who advocate a
full return to the use of gold as "money" need to
take a step back from our acquired preferences and prejudices
and realize that it was NOT just deception, propaganda, force,
and manipulation that were responsible for the considerable
perpetuation of fiat's use. We have to admit that people's
demand for fiat to fulfill that function - the currency function
- is, and always was - real.
The deception, coercion, and manipulation came
into the picture when our would-be rulers decided to make
us believe that fiat was also a good (or even an adequate)
store of value. They fed us the flat-out lie that fiat can
hold its value at least as well as gold or other real things
The illusion they have thus created and nurtured
is now wearing extremely thin. We are now witnessing a transition
from the old system of reinforcing that official lie by all
means necessary - to a system that acknowledges the "separate
but equal" use-functions of money - and allows the best
medium to serve each.
Fiat will be the currency of choice according
too its best-use function. Gold and precious metals will be
the store of value of choice according to the function it
Make no mistake: gold and PMs will still be
"money." That means, it will still have all three
of the functions of money, but it will not primarily be used
as a currency.
Fiat, on the other hand, will still trade as
"money" as well - but it will no longer be regarded
(or used) as an adequate, long-term store of value.
The idea is to completely take the social and
political controls off each medium, and let the free market
settle the argument as to which is worth how much in terms
of the other. I'm talking about the free physical market for
gold, not the contrived paper-contract market that we are
supposed to believe sets the "price" for gold today.
In the past, this was not possible because the
fiat-dollar reserve system had a lock on the world's currency
flows, and its acceptability world-wide depended so strongly
on the illusion that it was also a good or adequate store
After 1971, when the memory of gold's use as
money was still fresh in people's minds, and when a return
to a gold standard was at least still possible in the minds
of many, this white-washed dirty lie was a "necessity"
of sorts. But today, this lie has outlived its usefulness.
After more than thirty years, the continued
usefulness of fiat as currency can no longer be disputed.
At the same time, it is become clearer and clearer in the
minds of many (far ahead of whom are certain world financial
architects) that the store-of-value function of fiat is but
a sad joke.
These architects are now trying to devise an
international monetary system that attempts to divorce gold
from its primary currency-function, while at the same time
annulling fiat's sham marriage with the "store of value"
They surely got their work cut out for them,
but the idea itself is rather intriguing.
Just imagine a world where fiat and gold money
peacefully coexist - not in a death struggle with each other,
but in a symbiotic relationship where the price of one in
terms of the other is determined purely by free-market principles.
A free-market libertarian or classical liberal's
utopia? Maybe, but an interesting thought nevertheless. The
only question is: how do you get there?
Well, in one sense it's already happening.
The dollar is currently being dismantled as
the one major obstacle to achieving that state of things.
The creation, launch, and successful penetration by the euro
of the world's major currency markets (and uses) was the first
step to that end.
Despite the euro zone's persistent inability
to get off its socialist leaning, over-regulated duff economically,
and all the challenges attendant to a new, designer-made economic,
political, and currency union, with enlargement, budget deficit,
movement of labor, and a host of other problems to boot, the
euro is the only possible challenger to the dollar - and this
shows in how other nations cooperate when the going gets a
little too tough for the new toddler currency.
Case-in-point: Japan's sudden reversal of its
long-standing "buy the dollar at all cost" policy.
That reversal cannot be satisfactorily explained
by its alleged economic recovery alone. In January and February
of this year the BOJ spent almost as much as during the entire
year of 2003 to buy the yen down, implying that there was
a powerful need to do so - and then in March of this year
they are supposed to be doing so well all of a sudden that
they no longer need to keep their currency low? Come on!
Behind the scenes of mainstream financial press
reporting there is large consensus in the world today that
the US and its dollar must be "sidelined" as fast
as possible if the world is to be prevented from following
the deficit-plagued dollar to its ultimate demise. In order
to do this, guaranteeing the survival of the only feasible
challenger in the world reserve and trade currency arena is
therefore number one on their agenda.
Okay, fine. So, what does all of that have to
do with the title of this essay?
What needs to be realized is that gold is not
what is being threatened in this scenario. The dollar is the
one that just got added to the "endangered species"
list. The dollar, and by its proxy all fiat - is what is being
questioned and challenged. It is fiat's "price"
or ability to function as an acceptable store of value that
are under scrutiny.
The kicker is that the non-dollar currencies
do not really rely on the store-of-value illusion for their
viability. These currencies have never really been in a fight-to-the-death
scenario with the price fo gold as the dollar has. It was
the dollar that carried the banner after 1971 of gold's function
as a value-anchor, and tried to replace gold in that function.
The other currencies just sort of followed along, like the
eyes of spectators at a ping-pong or tennis match, following
the ball as it bounces back and forth from one court to the
other, and back.
For the dollar to fulfill the function to which
it arrogated itself, winning this battle with gold was a life-and-death
matter. But gold cannot be defeated long term - and the "spectators"
of this (mis)match have recognized that fact. It's like a
one-legged Joe Schmoe playing Andre Agassi at Wimbledon.
Having observed how poorly the dollar has performed
in the store-of-value arena, the other currency-issuers thought
to themselves: "Why should we bet our very existence
on the supposed ability of Joe Schmoe (the dollar) to do what
he obviously can never do? Just let Agassi win this match.
We're not in there, fighting for our lives. We can live with
Agassi being the winner."
And so the new concept of gold
for saving wealth and fiat for
buying wealth was born.
The "gold price" isn't really the
price of gold at all! Instead, it is the price that paper-contracts
on gold can fetch in a 99% cash-settlement driven market.
As time goes on, the irrelevance of that paper-trading
process to the true use-value of gold as a primary savings
asset will reveal itself. That process is inevitable. It makes
no difference to the real price of gold "what Greenspan
says", or whether the Fed raises its symbolic overnight
lending rate, or whatever.
When gold investors and the general public start
seeing that, the gold/fiat equation will balance itself, and
gold will naturally come out way on top. The only question
is the time line. Will we as individuals live to see the day?
Let me put it this way: the sun of that new
day has already come up over the horizon, and the cockroaches
are scampering into the nearest unlit corner. It's just that
we are impatient. We want to see it all happen NOW. Meanwhile
we are transfixed by the smoke and mirrors of the cockroaches'
"gold price" sideshow.
We need to look past the smoke and the mirrors.
That's when days like today (where the dollar jumps a bit
because of some lonely package at an airline counter in London,
and where the contrived paper-gold price falls down a few
stairs in the process) really don't matter all that much.
Let the cockroaches play some more. The "Orkin man"
is ringing the doorbell already.
"Yes, Sir. Step right into the kitchen,
The ridiculous "gold price" side-show
is irrelevant. There should be "fiat price-charts,"
not gold price-charts. There should be news-blurbs on the
price of fiat, as in: "And now the economic news of the
day: The dollar has been routed. A single unit of this almost
obsolete currency is now worth only 0.000007 grams of gold."
The paper-driven "price of gold" is
irrelevant. Gold will always be there, and since it is indestructible
and always useful, it will always have value in the eyes of
its beholders. With fiat, especially of the dollar-variety,
that is not the case anymore. Even the paper-markets are beginning
to recognize that. Witness the current volatility of the dollar.