It was the abandonment of the gold standard that made modern barbarism affordable
- 07 Novembre 2018
- by Blogger
The gold standard is seen as the product of voluntary exchange. The State’s enforcement of the laws of contract leads to the development of a commodity money. The commodity usually is gold or silver. Whatever commodity is portable, widely recognized, divisible, and has a high value in terms of weight and volume can function as money. But gold and silver are the common winners in the competition for money. Money is therefore initially not the product of State action. It is the product of voluntary exchange. This is the view of Austrian School economists: Mises, Rothbard, Hayek. The other view of gold argues that money is the product of State declaration, i.e., fiat announcement. Money is anything that the State says it is. This has been the view of all governments from the beginning of coinage in the sixth century B.C. The State’s gold standard can be extended as a result of military conquest. The victorious nation steals the gold hoard of the defeated nation. While the empire is expanding, the gold standard is possible. When the empire shrinks, gold is abandoned. The costs of empire led to the debasement of the currency.
Keynes’ statement on gold ("barbarous relic") came in the early 1920’s, which was when the British Empire had begun to fade. World War I had nearly bankrupted the British government. World War II would end the British empire. Lenin’s famous quote on gold was that gold would someday be used for public urinals. But that would be later. Under Communism, torture was common to get men to surrender their gold to the state. Barbarism began in the twentieth century when World War I broke out in 1914. Within weeks, the commercial banks suspended redeemability in gold. The governments authorized this and then had their central banks confiscate the confiscated gold from the commercial banks. The degree of barbarism that the war produced could not have been accomplished had a gold standard been in force. The public would have stripped the banks of the public’s gold. The governments would have had to come to terms with the enemy.
It was the abandonment of the gold standard that made modern barbarism affordable.
GS Gold Report: return of the "fear hedge"
Be Afraid of Getting Out
While we disagree with the concept of Gold as a valid fear hedge, we do not disagree that market participants view it as such. Our point is merely that Gold, an imperfect hedge for almost every issue concerning a lack of faith in human judgment, is a poor hedge for short term "flights to safety" or "fear hedging" simply because it is not a large market.
When it takes only a trillion USD to corner the gold market and that same amount trades daily in other markets, you cannot expect to be safe piling money into gold as if it were some 15 minute parking lot of safety. Gold is a roach motel upon exit if you are trying to beat the herd.
Gold: Not Perfect, but Perfect for You
In a world where there are custom financial hedges made for every specific risk and marketed in ETF form, there is only one generalist product that covers risk in all foibles of human kind making those instruments of mass destruction., Gold. We'd rather be 70% hedged against everything than 100% hedged against a "Nikkei rally in Italian bond terms" using some triple vol ETF.
Investing in Pet Rocks is Dumb
We also strongly disagree with any characterization of gold as an "investment". Investments are vehicles in which one expects a rate of return. The investment community should not consider gold as an investment any more than it considers money an investment. Investments offer a potential return based on value added to raw materials or machines used.
Suggested Gold Holding Time Frame: Do you really have to ask?
Gold is a hedge against paper FIAT debasement, and as such it should be held as long as one holds, earns, or spends, paper currency. The holding period is forever. The percentage held in gold is the variable.
Gold is also a trade-able asset and thus can be a wealth creator. We believe every bank that touts gold as a safety mechanism knows this and trades gold counter the momentum types.
Barbarous Relic or Timeless Store of Wealth? YES
So for our 2 cents: Gold is not an investment. Gold is not a hedge against fear or a flight to safety, gold is not to be treated as a reliable hedge against stock market corrections. Gold is a hedge against protracted bear markets that are underpinned by FIAT debasement damaging corporate earnings. And gold is something to trade. Finally, Gold is not officially money. That is to say gold is not money by FIAT (order), but is de-facto money in government hands. It is also the only universally accepted means of exchange across nation-state borders. It is a store of wealth
Golds is money that is all. Gold is not currency again... yet.
This article does not constitute investment advice and is not a solicitation for investment. Auromoney does not render general or specific investment advice and the information on this article should not be considered a recommendation to buy or sell gold or precious metals. Each reader is encouraged to consult with his or her individual financial professional and any action a reader takes as a result of information presented here is his or her own responsibility.