The Gold-Price is Irrelevant

By: Alex Wallenwein | Wed, Apr 28, 2004
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What really matters is not the fiat-price of gold, but the gold price of fiat.

Gold is always valuable because it combines in itself many use-functions. Nothing else in this world can replace it, and therefore nothing can ultimately displace it. Gold is independent of all of the ups and downs, the fads, the booms and the busts of the collective human psyche. It's just there. And it's always useful.

Paper-money, on the other hand, is extremely dependent.

It is dependent on the "faith" of the masses who use it that it will buy about the same thing tomorrow as it buys today. It is therefore dependent on the continued ability of those who issue it to instill that faith in the masses.

On top of that, it's use-function is rather limited. When it comes right down to it, fiat has only one intended use-function (money), and a couple of unintended ones (heating fuel, wallpaper, and bathroom tissue).

Needless to say that it fulfills neither of these (intended or unintended) use-functions very well. Gold, on the other hand, fulfills virtually all of its use-functions simultaneously in a most admirable way.

There is only one problem: People are gullible.

We are only too easily fooled about what has true value and what doesn't. And our experience with paper money proves that point beyond a reasonable doubt.

But the thirty year-plus success story of pure fiat money - against all expectations, and defiance of economic doctrines telling us of the calamities that befall any society that favors fiat money - have introduced a dynamic into the theory of money that simply cannot be denied, and that new dynamic is that.

People Demand Fiat

There's just no two ways about it.

Since any thing's value always depends on its usefulness to us as individuals and groups, and since fiat is in such demand, there must be at least one of the three functions of money (as a unit of account, medium of exchange, and store of value) that fiat performs exceedingly well, or the demand simply would not exist.

Certainly, deception, propaganda, force, and manipulation - and our willingness to be deceived as long as we see an advantage in it (or as long as it's convenient for us) - have all plaid a role in the establishment of fiat as "the" medium of exchange used by all people around the entire world. However, it would be dishonest to simply claim that these are the only elements that made fiat's long-term success possible.

Beyond the fact that rulers prefer fiat because they can control its rate of issuance, there appears to be some function that fiat obviously fulfills better than gold or silver, or at least as well. That function is its dual function as a "unit of account " and as a "medium of exchange." In short, it is its function as "currency."

It is here where those of us who advocate a full return to the use of gold as "money" need to take a step back from our acquired preferences and prejudices and realize that it was NOT just deception, propaganda, force, and manipulation that were responsible for the considerable perpetuation of fiat's use. We have to admit that people's demand for fiat to fulfill that function - the currency function - is, and always was - real.

The deception, coercion, and manipulation came into the picture when our would-be rulers decided to make us believe that fiat was also a good (or even an adequate) store of value. They fed us the flat-out lie that fiat can hold its value at least as well as gold or other real things can.

The illusion they have thus created and nurtured is now wearing extremely thin. We are now witnessing a transition from the old system of reinforcing that official lie by all means necessary - to a system that acknowledges the "separate but equal" use-functions of money - and allows the best medium to serve each.

Fiat will be the currency of choice according too its best-use function. Gold and precious metals will be the store of value of choice according to the function it fulfills best.

Make no mistake: gold and PMs will still be "money." That means, it will still have all three of the functions of money, but it will not primarily be used as a currency.

Fiat, on the other hand, will still trade as "money" as well - but it will no longer be regarded (or used) as an adequate, long-term store of value.

The idea is to completely take the social and political controls off each medium, and let the free market settle the argument as to which is worth how much in terms of the other. I'm talking about the free physical market for gold, not the contrived paper-contract market that we are supposed to believe sets the "price" for gold today.

In the past, this was not possible because the fiat-dollar reserve system had a lock on the world's currency flows, and its acceptability world-wide depended so strongly on the illusion that it was also a good or adequate store of value.

After 1971, when the memory of gold's use as money was still fresh in people's minds, and when a return to a gold standard was at least still possible in the minds of many, this white-washed dirty lie was a "necessity" of sorts. But today, this lie has outlived its usefulness.

After more than thirty years, the continued usefulness of fiat as currency can no longer be disputed. At the same time, it is become clearer and clearer in the minds of many (far ahead of whom are certain world financial architects) that the store-of-value function of fiat is but a sad joke.

These architects are now trying to devise an international monetary system that attempts to divorce gold from its primary currency-function, while at the same time annulling fiat's sham marriage with the "store of value" function.

They surely got their work cut out for them, but the idea itself is rather intriguing.

Just imagine a world where fiat and gold money peacefully coexist - not in a death struggle with each other, but in a symbiotic relationship where the price of one in terms of the other is determined purely by free-market principles.

A free-market libertarian or classical liberal's utopia? Maybe, but an interesting thought nevertheless. The only question is: how do you get there?

Well, in one sense it's already happening.

The dollar is currently being dismantled as the one major obstacle to achieving that state of things. The creation, launch, and successful penetration by the euro of the world's major currency markets (and uses) was the first step to that end.

Despite the euro zone's persistent inability to get off its socialist leaning, over-regulated duff economically, and all the challenges attendant to a new, designer-made economic, political, and currency union, with enlargement, budget deficit, movement of labor, and a host of other problems to boot, the euro is the only possible challenger to the dollar - and this shows in how other nations cooperate when the going gets a little too tough for the new toddler currency.

Case-in-point: Japan's sudden reversal of its long-standing "buy the dollar at all cost" policy.

That reversal cannot be satisfactorily explained by its alleged economic recovery alone. In January and February of this year the BOJ spent almost as much as during the entire year of 2003 to buy the yen down, implying that there was a powerful need to do so - and then in March of this year they are supposed to be doing so well all of a sudden that they no longer need to keep their currency low? Come on!

Behind the scenes of mainstream financial press reporting there is large consensus in the world today that the US and its dollar must be "sidelined" as fast as possible if the world is to be prevented from following the deficit-plagued dollar to its ultimate demise. In order to do this, guaranteeing the survival of the only feasible challenger in the world reserve and trade currency arena is therefore number one on their agenda.

Okay, fine. So, what does all of that have to do with the title of this essay?

What needs to be realized is that gold is not what is being threatened in this scenario. The dollar is the one that just got added to the "endangered species" list. The dollar, and by its proxy all fiat - is what is being questioned and challenged. It is fiat's "price" or ability to function as an acceptable store of value that are under scrutiny.

The kicker is that the non-dollar currencies do not really rely on the store-of-value illusion for their viability. These currencies have never really been in a fight-to-the-death scenario with the price fo gold as the dollar has. It was the dollar that carried the banner after 1971 of gold's function as a value-anchor, and tried to replace gold in that function. The other currencies just sort of followed along, like the eyes of spectators at a ping-pong or tennis match, following the ball as it bounces back and forth from one court to the other, and back.

For the dollar to fulfill the function to which it arrogated itself, winning this battle with gold was a life-and-death matter. But gold cannot be defeated long term - and the "spectators" of this (mis)match have recognized that fact. It's like a one-legged Joe Schmoe playing Andre Agassi at Wimbledon.

Having observed how poorly the dollar has performed in the store-of-value arena, the other currency-issuers thought to themselves: "Why should we bet our very existence on the supposed ability of Joe Schmoe (the dollar) to do what he obviously can never do? Just let Agassi win this match. We're not in there, fighting for our lives. We can live with Agassi being the winner."

And so the new concept of gold for saving wealth and fiat for buying wealth was born.

The "gold price" isn't really the price of gold at all! Instead, it is the price that paper-contracts on gold can fetch in a 99% cash-settlement driven market.

As time goes on, the irrelevance of that paper-trading process to the true use-value of gold as a primary savings asset will reveal itself. That process is inevitable. It makes no difference to the real price of gold "what Greenspan says", or whether the Fed raises its symbolic overnight lending rate, or whatever.

When gold investors and the general public start seeing that, the gold/fiat equation will balance itself, and gold will naturally come out way on top. The only question is the time line. Will we as individuals live to see the day?

Let me put it this way: the sun of that new day has already come up over the horizon, and the cockroaches are scampering into the nearest unlit corner. It's just that we are impatient. We want to see it all happen NOW. Meanwhile we are transfixed by the smoke and mirrors of the cockroaches' "gold price" sideshow.

We need to look past the smoke and the mirrors. That's when days like today (where the dollar jumps a bit because of some lonely package at an airline counter in London, and where the contrived paper-gold price falls down a few stairs in the process) really don't matter all that much. Let the cockroaches play some more. The "Orkin man" is ringing the doorbell already.

"Yes, Sir. Step right into the kitchen, please ..."

The ridiculous "gold price" side-show is irrelevant. There should be "fiat price-charts," not gold price-charts. There should be news-blurbs on the price of fiat, as in: "And now the economic news of the day: The dollar has been routed. A single unit of this almost obsolete currency is now worth only 0.000007 grams of gold."

The paper-driven "price of gold" is irrelevant. Gold will always be there, and since it is indestructible and always useful, it will always have value in the eyes of its beholders. With fiat, especially of the dollar-variety, that is not the case anymore. Even the paper-markets are beginning to recognize that. Witness the current volatility of the dollar.

Got gold?


Author: Alex Wallenwein

Alex Wallenwein
Editor, Publisher
The Euro vs Dollar Monitor

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