Let reason end the gold fever

By Henry C K Liu

In view of much recent talk on the safety of gold, with investors looking for a place of safety amid the European debt crisis and faltering stock markets, it may be necessary to let reason break the gold fever.

Safety in physical gold over fiat money is a myth.

One cannot eat gold any more than one can eat fiat paper money, such as the dollar. The gold market is all about gold derivatives, not about physical gold. One cannot transact physical gold in any substantial quantities beyond a few gold bars one can physically carry. For most people that is a few hundred ounces. Remember Richard III: "A horse, A horse, my kingdom for a horse" ... (and all the gold in it).

Gold funds are all scams that play on consumer fear and ignorance. They are never really backed by physical gold, only a claim on physical gold at a bullion bank in London. As we all know, a claim is just a claim, not the same as physical delivery. It depends on the credibility of the party against which a claim is filed.

The biggest financial inertia about gold is that it does not pay interest, unless the gold is leased out, which then carries the risk of not having it returned by the lessee to the lessor.

Ironically, the people holding the most secured assets at any one time are the traders of assets with unimpaired liquidity. Security in the market is the ability to sell at a given price at any time, not possession itself. The value of one’s possessions is determined by the price at which one can sell it for, discounted by the timing of the sale. No more, no less. (See my articles on the gold market - which is not the same as writings on gold - listed below). As I wrote in my article "Monetary Theology" [1] : Davanzati showed how "barter is a necessary complement of division of labor amongst men and amongst nations"; and how there is easily a "want of coincidence in barter", which calls for a "medium of exchange"; and this medium must be capable of "subdivision" and be a "store of value".

He remarked "that one single egg was more worth to Count Ugolino in his tower [prison] than all the gold of the world", but that on the other hand, "ten thousand grains of corn are only worth one of gold in the market", and that "water, however necessary for life, is worth nothing, because superabundant".

That was of course before International Monetary Fund (IMF) conditionality requiring the poor in the indebted Third World to pay for water through privatization of basic utilities to service foreign debt. ...

Davanzati observed that in the siege of Casilino, "a rat was sold for 200 florins, and the price could not be called exaggerated, because next day the man who sold it was starved and the man who bought it was still alive".

Of course, modern economists would call that a market failure. Davanzati viewed all the money in a country as worth all the goods because the one exchanges for the other and nobody wants money for its own sake. Davanzati did not know anything about the velocity of money, and only recognized that every country needs a different quantity of money, as different human frames need different quantities of blood.

The mint ought to coin money gratuitously for everybody; and the fear that, if the coins are too good, they should be exported is simply illusory because they must have been paid for by the exporter.

Notes

1. See Banking bunkum, Asia Times Online, November 6, 2002.
2. For Henry CK Liu’s articles on the gold market, see:
Part II: Gold Keeps Rising as Other Commodities Fall
Part III: Labor Markets de-linked from the Gold Market
Part IV: Central Banks and Gold
Part V: Central Banks and Gold Liquidity
Part VI: The London Gold Market
Part VII: Weak Political Response to Ineffective Financial Regulation
Part VIII: Gold and Fiat Currencies, February 11, 2011
Part IX: International Gold Agreements - Historical Political Context

Henry C K Liu is chairman of a New York-based private investment group. His website is at www.henryckliu.com

(Copyright 2012 Henry C K Liu)