Wednesday, January 9, 2008

Another high for gold

Gold hit another all time high at $890/oz.

Silver also hit recent highs

The important thing to remember is that the value of gold doesn't change. A gold coin today will be the same gold coin tomorrow and will be the same gold coin 10 years from now. Gold is not consumed, it doesn't have a shelf life, and nearly all the gold ever mined is still in existence today in someone's possession. Gold is valuable because it is scarce and because it has been used as money for thousands of years of human history. It's only a recent phenomenon that gold is no longer used as money (1971 when Nixon took the US off the gold standard).

When the dollar price of gold keeps rising, it doesn't indicate any change in the value of gold. It indicates a change in the value of a dollar. It isn't that gold is rising in price, but the dollars are becoming less valuable. This is happening at an alarming and accelerating rate. I don't see how this can continue much longer. If it does, we will be in the midst of a real dollar crisis. It will take serious intervention of our foreign creditors to prop the dollar back up. Otherwise, our militaristic empire and welfare state will come to an abrupt and sudden halt. Ron Paul has been repeating over and over that we need to fix our monetary system before we are forced into a painful financial crisis. We may now be witnessing it unfolding.

I recommend reading The End of Dollar Hegemony by Ron Paul.

1 comment:

Michael said...

You say that the real value of gold doesn't change, but that doesn't make sense to me for a couple of reasons:

1) Just because the supply of something is fixed doesn't mean that its value is fixed. Demand can fluctuate. For example, there will never be another 1986 Donruss Jose Canseco rookie card printed.

What if we discovered a new industrial process that consumed tons of gold? The price of gold would rise rapidly, but it wouldn't have anything to do with our economy. Are you claiming that such an event cannot happen?

2) Your post implies that the price of gold tracks real inflation in the US, but how do you account for other floating currencies in the world? The value of the dollar changes against the value of the euro or the pound, both of which are currently fiat currencies. Is the correlation of the dollar:euro and dollar:gold ratios 1:1? It's too early for me to figure out what the math *should* be if your argument is correct, but you should be able to figure it out.