Register for Free
Post comments, receive updates via email, gain access to exclusive content, and more.
Spam Safe!
What is gold backed by?
Gold needs no backing since, unlike the dollar (or any other banknote) it is not a promise to pay in the future, a bond if you will. It is a real commodity just like oil, wheat, cattle etc. And that is just what money is, the most marketable commodity. Various marketable commodities have been utilised as money in different places at different times. In fact, I recently read an article on www.mises.org describing how after the US invasion of Iraq and the collapse of the Iraqi government, the Iraqi Dinar (as issued by Saddam) was worthless. The people, particularly in the country immediately switched to other commodities as means of exchange. The most marketable and thus money became sheep. Think of it, houses priced in sheep!
For a bond to have value it must be collateralised. Think of a cheque, a cheque is a promise to pay dollars in the future, but what is the value of a cheque that's not collateralised by dollars. Nothing, it bounces!. The dollar is in essence a bearer cheque.
Also, the idea that gold has no practical uses is incorrect. Gold has a very practical use and that use is money.
What is gold backed by?
1. As with any other commodity - scarcity in the face of demand.
2. The universal consensus that it has value. If your government decrees that it's not worth anything, it's still worth something elsewhere in the world. From a logical standpoint, of course this consensus could be changed, but there is no (non-malicious) incentive to and it would be nearly impossible to do. This is what has been tried by western fiat currencies for the past 40 years.
2. Portability. Much value can be carried around in a very small amount (this is the reason why oil and copper cannot replace it easily)
3. Difficult to consume/destroy. Although it is a soft metal and is maleable, it is not typically a consumable. That means that, unlike oil, the amounts (supply) above ground on earth now will not change radically or exponentially like oil will. Neither does it corrode. Therefore, this inherently makes it stable while its value is reliant on demand for it.
4. History. 6000 years is a long time for something to retain value. At one time, Tulips were an incredibly valuable commodity, so was religious influence, leather, uranium, oil, etc. But the uses and importance of these commodities will ebb and flow depending on our technology. Gold keeps out of the "technologically useful" realm for the most part and therefore makes it a "transcendental" commodity.
- Gold is just another financial asset like stocks, bonds, etc.. It is not money, its an investment.
- Its not a store of wealth any more than a stock certificate serves as a store of wealth.
- Its value is determined by the probability of selling it for more dollars than was given to purchase it.
- This probability is increased if the majority of the other market participants are seeking to buy gold for whatever reason.
- This probability is decreased if the majority of the other market participants are seeking to sell gold for whatever reason.
- In theory, gold could serve as a store of purchasing power and a barter currency in the absence of a government and financial system. But until the government accepts gold as payment for taxes, or ceases to exist, gold is only an investment and nothing more. But even if the government one day ceases to exist, then I would expect that many things would become more valuable than gold (got bullets?).
- The probability of making a profit on your gold investment is significantly diminished if you must sell it because you have an immediate need for cash.
- Its a mistake to assume that in times of panic or crisis, that any investment, including gold, will return a profit. When people are in "panic mode" they are concerned about one thing....survival. Cash is the most flexible means of ensuring survival.
Jeff,
I'd respectfully disagree with you on a number of points. Gold is not just another investment. It's also a currency. More importantly, it's insurance ... insurance against currency debasement or collapse or a host of other adverse situations.
It is most definitely a store of wealth. If your house burns down, gold is still there, in the ashes. Your stock certificate is just ashes. Gold will never go to zero value ... unless a honking big, pure gold asteroid hits the planet ... and even then, it still won't be zero. Stocks and their certificates can become worthless (witness Enron, WorldCom, and a host of others). Gold will not. It won't rust, won't corrode, won't burn, won't rot, won't default, won't go bankrupt, won't inflate away to nothing, etc. And you can carry a valuable quantity of it on your person unlike real estate, farm land, timberland, clean air, clean water, soil, etc. It's highly portable. And you can even hide in up your hiney.;-)
Ask the boat people fleeing Vietnam how worthwhile their cash was. Ask the Zimbabweans if they're panning for stock certificates, cash, or soil. Ask Germans in the Weimar Republic or Argentinians in 2001 how worthwhile their cash was. At least 20 countries have experienced hyperinflationary events since 1980 and more will follow. History has proven over and over and over again that gold trumps cash in economic panics and crises.
With gold, one shouldn't necessarily look to it for a return on capital but rather a return of capital. But then again, if you've held it since 2001, compared to most stocks, bonds, cash, commodities, real estate, etc., your ROI has been quite good.
I'm not saying bet the whole ranch on PMs alone but it's a pretty important piece of the puzzle.
But I always appreciate your contrarian POV.
"Over the years, gold has not been a good investment. Actually over the past 200 years, its returns have barely kept up with inflation." ---Andy Abraham
I'm sure there are plenty of isolated periods where gold has not kept pace with inflation, but "over the past 200 years" it has actually done very well. It obviously did fine up until 1913, as there was little or no inflation. And then, since that infamous year, assuming the dollar has lost about 95% of it's purchasing power, as we are commonly told, gold, which was about $20 an ounce at the time, would only have to be about $400 today to keep up. Gold's at about $1150, last I checked.
Well, I think rickets questions have been addressed by smarter foks than me, but here's my take on the PM issue. Of all the "monies" out there, gold is probably the only one that hasn't needed "backing" for thousands of years. Trusting your survival to gold holdings alone is foolish, I'm sure. I'm debt free, including my home. I'm totally out of the market after taking a brutal haircut. Given what we're learning about the market these days, I can't ever imagine having the guts to get back into stocks. I'm spending my cash as fast as I can on a useful addition to my home- I'm a weekend-warrior carpenter. I've bought some more good tools lately, and some other items that may be valuable in the coming times. Amazingly and thankfully I've still got some cash left over. I worry about it's future value, let alone which bank to keep it in. So I think I'll probably "invest" in some gold in the future. Having some can't hurt, having none may. What else should I do given my situation? I agree with many others that gold is just one part of a well-balanced portfolio- your home, tools for living, some cash, some PM's, family and your neighbors. Aloha, Steve (Being thankful for all I'm blessed with......)
If you place your nose upon the grindstone, rough,
and hold it down there long enough,
you'll soon forget there are such things
as brooks that babble and birds that sing,
and your whole world will just then compose
of you, the stone, and your ground-down nose.
Author unknown....
Hi ao,
Just wanted to clarify that its just my point of view, and that it is specific to our present situation here in the US. For example:
If gold was money, I could pay my taxes with it. Since I cannot, I have to liquidate it to cash to pay taxes, or to purchase anything within the framework of our economic system. Therefore its an investment and not money in this specific context.
At least 20 countries have experienced hyperinflationary events since 1980 and more will follow.
Can you show me one country that has a credit-based monetary system that has experienced hyperinflation? I have yet to find one. It is true that the US monetary system is actually a hybrid system, primarily consisting of debt-based money with a small fiat-money component, but 90% of the inflation in our system is generated by the credit-based money issued by the Fractional Reserve Lending banking system. Credit (debt)-based money is self-liquidating, thus its inflationary impact is always held in check by its eventual deflationary impact. (See The Roving Cavaliers of Credit by Steve Keen for more on the structure of our monetary system)
On a personal note, I want you to know that I have learned something from everyone of your posts, thus I very much appreciate your perspective as well. Thank you....Jeff
Captain Sheeple
What property fulfills gold's role as a medium of exchange? Of course land has more intrinsic value, but it's not portable. Gold is relatively rare, impossible to counterfeit. (tungsten story not withstanding). Evaluating gold's real value is a worthy logical exercise, though it's pretty ironic if those deriding it, extol the virtue of paper fiat, at the same time.
Gold has: History, Confidence, and Human Nature backing it. That's enough for me!
Hi JAG, I respectfully wish to raise some thoughts into your post:
Well, you used to be able to with gold backed currency, and who made the modern rules now that you cannot?
But gold has held a constant value, even if its inconvenient as a transactional form of money. So I would argue its really not an investment, its just true money being subject to the mispricings of the fiat currency cartel.
If we lived in a village, and I act like a bank and make a daisy-chain of bad loans, I dont see how that in any way affects the price of my eggs, milk, and oil fron their respective producers. In fact I see them raising prices as insurance against my careless and crazy inflating ways.
Deflationary concepts seem so "top-down," and I guess my perspective has always been "bottom-up"... am I making any sense here?
[/quote]
Gold has few practical uses. But that is a big part of it's value. Hear me out. Since it has few uses, very little gold has been used up over the centuries. It is also reasonably finite, easy to divide, easy to assay, doesn't corrode, etc etc.
So let's say you want some of the corn I grew to feed your cow. You can't pay me buy slicing off a piece of cow (at least until it's eaten the corn and grown up). So we need some kind of place holder. It could just be an IOU. And if you are my neighbor I'd probably accept that. But you can see that it's much simpler to give me something that I know can't be copied or can crumble away. Gold is very handy for that. I don't see how one can say it isn't money. It makes an excellent money.
Now of course if I'm starving I'd rather have that slice of cow, but if any kind of workable society exists, some form of money is needed. Look at Zimbabwe. It's very disfunctional yet gold works there as money. I remember someone posted a video about this a while back and it was noted that a loaf of bread cost something like (as I recall) a tenth of a gram of gold which, at the time worked out to about $2.50 - so with super hyper inflation of their fiat currency, gold held it's value as money.