Monday, July 18, 2011

Gold and the Question of Value: Part One

Value is a difficult concept to define in times like these.

Value is based on scarcity. It is an economic law based on supply and demand. The less you have of a good or service that is wanted or needed, then the greater the value of that good or service.

For example, compare a cheap handbag from China for $20.00 to a luxury handbag from Louis Vuitton for $2000.00. The difference in price being the scarcity of the designers available for excellent handbags, the best leather used, and other materials, and the experienced craftsmen that make a great Louis Vuitton handbag.

When the value of goods and services (measured in fiat money) is distorted through massive Central Bank intervention, the market tries to rediscover value through price. And some sections of the market, for example speculators, can take short term advantage of these distortions to make money. Not ideal.

Since 1971, when the gold window was closed, value has been measured in fiat money. Before, that, there was some form of gold standard in which value was based.

An example of value distortions created by Central Banks is the New Zealand dollar. Somehow the market has deemed, temporarily, that the NZ dollar should increase in value against the US dollar. We as New Zealanders can now buy most 'things' cheaper when they are denominated in US dollars. But is the NZ dollar more valuable now than three months ago? Perhaps not, especially when the private/public debt in New Zealand is 132% of GDP or $253,000,000,000 ($253 billion) with no possible likelihood of it ever being repaid.

So this distortion by Central Banks creates uncertain values. Andrew Jackson made this statement in 1837:

"The paper system being founded on public confidence and having of itself no intrinsic value, it is liable to great and sudden fluctuations, thereby rendering property insecure and the wages of labor unsteady and uncertain...if your currency continues as exclusively paper as it now is, it will foster this eager desire to amass wealth without labor".

These distortions can allow a small group of people at the top of the money chain to gain wealth without adding value. The value being literally stolen from those who get the paper money last. This is a product of inflation.

You see, wealth cannot be created from 'thin air'. Someone ends up paying and those people are usually the ones trying to create wealth with their labour.

Fiat currencies have 'value' because we believe that the government in charge will not reneg on its obligations to that 'value'. Some currencies demand higher interest rates because people buying those currencies have less 'faith' in the government, institutions or military power (perhaps) to pay back those 'value' obligations.

The US can charge lower interest rates because of the historical stability of their economy. They have never defaulted on their obligations to pay back fair value.

But that could all change on August 2. What market value would be placed on the paper obligations of the United States then?

If 'faith' in paper fails, and it is failing fast, then gold will provide the best indication of value.

More on that in Part Two.

Gold in New Zealand dollars: $1883.75 per oz
Previous all time high: $1955.10 per oz

Silver in New Zealand dollars: $46.80 per oz
Previous all time high: $59.19
per oz

Articles of interest:

James Turk: Gold Is Our Defense Against the Fiat Currency Graveyard

See article here

IMF Makes Room at the Global Currency Table for China

See article here

The Anglo-Far East Company
The Original Private Bullion Custodian
Your reference: an-001

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