Gold is Money

Gold is Money

The earliest form of money that we are aware of was cattle. That was a very, very long time ago. In the last several thousands of years gold has been considered money.

Beginning in 1788 the US adopted a “Gold Standard” by which its money supply was regulated by the mining of gold, which rose at a rate of 3-5% per year. This gave the US a stable money supply where over expansion was less likely and where people had confidence in the US currency.

There were some runs on money, particularly in 1907, but for the most part stable money enabled the US to expand its industry, production and the wealth of its people vastly.

During the 1920’s, however, there was a very large over expansion of credit, very similar to the Fannie Mae and Freddie Mac mortgage debacle we are experiencing the fall out over. The over expansion of credit in the 1920’s led directly to the Great Depression.

The difference between the gold standard before and after 1913 was, of course, the Federal Reserve, which was created in 1913 under the Woodrow Wilson Administration.

Prior to 1913 credit was much more restricted. After 1913 credit became much more readily available. It was the direct actions of easy credit, spurred by the Federal Reserve which lead to the Great Depression, just as it was the easy credit which began in the 1990’s, which lead to the 2008 financial collapse.

What is Different Today

What is different today is that gold has been being treated as a commodity since 1971, rather than as money. As a result, gold is currently under valued, despite its record highs.

Record highs compared to what?

In 1933 an ounce of gold was worth $20.67 and was fixed in value because of the gold standard. In 1933 the base M1 US money was under $22 billion. Today the M1 money supply is around $1.7 trillion and has gone up about $900 billion ($0.9 trillion) in the last 12 months or so. Nearly double in a single year’s time.

During WWII the US held around 649.6 million troy ounces of gold bullion to cover an approximate base money supply of about $64 billion in 1943. These are rough approximations as I couldn’t find exact figures but took the numbers off of some graphs.

As of 31 Oct 2009 the US Treasury holds 261.5 ounces of gold bullion.

If we take $64 billion divided by 649.6 million ounces we get $98.5 per troy ounce.

If we take $1.7 trillion divided by 261.5 million ounces we get $6500 per troy ounce. [The M1 figure is a rough approximation of numbers taken from graphs. The troy ounces for 29 Oct 2009 was taken from the US Treasury's website.]

In other words, when we treat gold as money, a money supply which cannot be printed or multiplied by governments to make their debts cheaper to pay off, we can see that gold could be valued at $6500 per troy ounce.

Here’s some links of interest:

http://transcripts.businessday.co.za/cgi-bin/transcripts/t-showtranscript.pl?1259805561

http://www.bloomberg.com/apps/news?pid=20601012&sid=aY8H6XXc2Wl0

http://www.kitco.com/ind/Nathan/dec012009.html

http://www.kitco.com/ind/stansberry/dec022009.html

http://www.chartingstocks.net/2009/03/chart-of-the-us-money-supply-1917-2009/

Speculation and Profit Taking

There is no doubt that there will be people who are buying gold today with the intent of quickly selling it off as soon as they see it will be going down. These people are called speculators and speculators work whatever market is currently going up and they drive the prices up by buying and getting others to buy. Then they sell and once they sell, they get others to sell, which drives the prices down, often further than when the speculators latched on.

Of course, the speculators time their purchases and sales so that they exit with vast profits.

There is a real possibility that this could occur with gold, silver, platinum and palladium and other commodities.

Metals are rising faster than I had expected. Oil is not joining metals, however.

When Will We Know?

We will know if gold and metals are going to hold their value when the next major financial default hits. Dubai’s delaying debt payments gave a gold a short pause last week, but gold only dropped 5% and back to new highs after only 3 trading days.

Gold Should be the Safe Haven of Choice

Gold should be the safe haven of choice, not the US Dollar, simply because the US Dollar is being devalued rapidly by excessive government spending and the monetization of debt while gold cannot be created out of thin air.

[Via http://samueljchristie.wordpress.com]