Its Gold Baby!

Gold. Panned for in ’49, coveted by pirates, and sold as a thin film on the worthless coins pushed on late night TV, gold still has control of our imagination. I would certainly love to have gold; about 100 pounds of the stuff would set me up just so. Yes sir, if I had 100 pounds of gold, I would sell it and take the cash.

“But why would you want U.S. dollars, when the dollar is losing value? Gold has a value all its own, dollars are only backed by trust.”

The previous statement neatly summarizes my conversations with most people these days. It also sums up the thoughts of a great many TV talking heads. It does have a certain comfortable logic, and fits in nicely with most American’s highly pessimistic moods these days. As I have written before though, it is absolutely false! By way of explanation, I have included a list:

  1. A decline in the dollar’s value versus a foreign currency IS NOT the same as a loss of domestic purchasing power. Period. The relative values, known as “spot rates”, change on the FOREX market all the time, and yet I’ll bet that gold you would all like that your favorite fast food value meal costs the same as it did last week.
  2. Inflation is the loss of domestic purchasing power, and it is not in play…yet. Because we printed dollars to finance some of the deficit, inflation will start to set in sometime after the unemployment rate falls enough for folks to start spending again. The consumer price index was actually negative for the previous 12 months, meaning that we were experiencing deflation.
  3. A decline in the dollar’s value is actually not a bad thing. I know, I know, we Americans like to be number one, but in this case it is a bad deal. We have a trade deficit in large part because other currencies, namely the Chinese Yuan, are undervalued in relation to our dollar. This means that their exports are less expensive for us to buy, and our exports to them are more expensive for them to buy. As the dollar declines relative to Chinese money, U.S. companies will be able to sell more goods to China. There is a strong cause and effect relationship between the trade deficit and federal budget deficits, so a declining dollar will help us get through this mess.
  4. The dollar is liquid. It is more valuable than gold, because you can use it. Have you tried to pay the restaurant in gold recently? Do you suppose that the ice cream parlor, or pest control guy is going to accept some nuggets in exchange for product and service. The dollar is backed by the “full faith and credit of the United States government”. Folks, we have a democracy in this country; we are the full faith and credit of America, and I am not just being sappy.
  5. Why is gold valuable? I keep hearing that gold has intrinsic value and paper money doesn’t. The previous point makes the case for the dollar’s intrinsic value, where is gold’s case? When someone tells you that gold has value, ask them what that value is. It is the substance that the Byzantine Empire used to strike coins in; the Romans before them placed a higher value on salt, and so used it as a common currency (thus was a man “worth his salt”). Gold is valuable because some people believe it to be so. Its cash value is determined by the market (just like the dollar’s), and it is largely illiquid. If the average Joe decides to sell his gold, he is likely to do so at below-market rates.

The news shows on the tube just aren’t doing a very good job reporting facts anymore. I guess the facts aren’t exciting enough to make money. Personally, the rational middle believes the facts to be….good as gold.

The rational middle waits for your comments…