Mon Nov 30th, 2009 at 07:31:39 AM EST
With all the economic instability roiling around, it isn't surprising that the gold bugs are out in force, claiming everything went to Hell in a handbasket when we went off the gold standard and that gold can restabilize everything. A couple of thoughts on that.
originally posted on November 25 - Nomad
First, I believe it was absolutely correct that the US went off the gold standard and backed the USD with the whole economy, saying "The USD has value not because we have gold in a vault but because you can use it to buy timber and steel and refrigerators." If gold had remained the sole basis for currency, South Africa and the Soviet Union would have had the top two currencies for years, and now Peru, Indonesia, Uzbekistan, and Ghana would be top tens.
The currency problem did not arise from changing to a new standard but rather from changing the new standard itself. The US went from, "You can use your paper dollars to buy this ship we just made" to "You can use your paper dollars to buy this security we just made." "Paper for steel" became "paper for paper", and the currency started to slide.
Second, while gold itself is solid, much of the market for some time has not been real gold but exchange traded gold, and I would submit that ET gold has become a psychological fungible for real gold. I would further submit that this has in fact provided an avenue for "financial engineers" to manipulate gold prices. And I would even go so far as to submit that this is why, for several years up until very recently, gold prices seemed to move with major currencies instead of against them. Because ET gold is really just a piece of paper supposedly representing a certain amount of gold in a vault. Which is what paper money originally was.
Given this manipulative element that has been injected into the market, how stable is gold? And then there is always the little problem that you can't eat, live in it, or shoot somebody with it, and if the bottom really falls out, those are the things that will matter.