Saturday, March 1, 2008

Get Gold

The usually intriguing and insightful Mencius Moldbug has an excellent discussion of gold and uses the "stock-flow" ratio, 28 February 2008, at his website, Way to go Mencius.

I think one reason gold is money instead of say, platinum, silver or palladium, all "near monies" in my opinion, is that each of these metals has too many alternative uses, i.e., each is too useful to mankind to "waste" as money. As Fred Cederholm would say, think about it.

One thing people need consider in determining what is money, is whether or not the good is endogamous to the economic system or exogenous from it. Gold will be produced when it can be at a profit, hence if too much gold is produced, and its' value falls, which we see as high prices of other goods in gold terms, the mines close until gold production is profitable again. This is clearer in the case of the approximately 400,000 US "stripper wells" which were closed because of low oil prices, some of which are being reopened. Gold mines closed in 1942 by government order, many of which stayed closed after WWII since gold's "price" was fixed at $35 and WWII inflation had reduced the dollar's value, making mining costs too high to be profitable. If too little gold is produced, the gold price of other things falls, mining costs drop and the mines reopen. Again, this is more visible in oil production. The "cost" of oil production is increasing as royalties to land owners go up, countries like Venezeula demand higher severance taxes and salaries to oil workers increase. In effect, the "oil price" of other things falls.

People conjur up demons about new methods of producing gold which might make it a poor store of value. The only time I know of in which gold's value was significantly reduced, except by government inflationary policies, was in about 1500-1540, when the Spaniards came to the New World. The Spaniards found much gold and silver here, which they brought back to Europe leading to a reduction in the metals exchange value for other goods, i.e., "inflation".


Buzz Saw said...

I look at gold and other stuff by what is it worth to me. I am not a wealthy person, but a few years ago when silver was $4.00 per ounce that seemed like a good deal. I can still only sell it for $12 - $14 here at the coin shops and pawn shops, so I definitely would not buy for $20. Gold is the same way, when it was $250 - $400 it seemed like a good deal, but I was too poor to afford anything but a few 14k jewelry pieces. Even now you can only sell 14k around here for $300+ so no way would I pay $1000 for a single coin. Platinum is OMG expensive, I sure wish the solar system had seen fit to deposit a bunch more of that stuff where we could get at it. Platinum, the "green" precious metal.

winged unicorn said...

excellent. should be required reading in high school economics courses.[pause] maybe college too. why assume the teachers explain anything better in higher education

Independent Accountant said...

Buzz Saw:
What gold is worth to you is irrelevant to the market. It doesn't care. What is relevant: will the "price" of gold increase faster than that of other goods. If so, you should hold it. Is gold expensive? Relative to what? Do you think you will be better off holding paper dollars over the next ten years than gold? I think you're better off holding canned tuna fish.

Independent Accountant said...

Winged Unicorn:
Thanks. Having school children read Andrew Jackson's speeches might be useful too. The problem with many teachers is they don't think. If they did, they would realize that the Fed is just America's "counterfeiter in chief".

Buzz Saw said...

[i]Do you think you will be better off holding paper dollars over the next ten years than gold? I think you're better off holding canned tuna fish.[/i]

Dollars rather than gold right now, yes, but tuna fish is what I trade all my dollars for as soon as they hit my hot little hands. No lie, buying food with my money is my bet.

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