Among our teachings at CCCC is that emotions trump logic, and nowhere is this more true than
in the arena of finance. Stock markets frequently go up and down depending on the mood of
people or their level of confidence in the economy. For example today, people lack confidence
in the market – a feeling no less. And as a result, the economy has no chance to be robust, but
sputters along thereby contributing to humans’ current self-fulfilling negative prophesy.
Gold, likewise has its emotional story which spans the timeframe of the human race from
ancient Mayans, Aztecs and Egyptians to the present.
Let’s face it, compared with other metals, gold is useless. Lead, iron, copper, etc. can all
be put to productive use. Gold is merely pretty. It has very little material function, so in ancient
times it was used for decoration – to signify power of the leaders, for the most part – gold
crowns, robes, thrones and even gold toilets.
Only in the 1500’s to 1800’s did gold take on a value for trade, when gold coins became
the monetary exchange medium. Gold coins required the same leap of faith as silver coins or
paper money. The faith was that others would value the specie as much as you yourself would.
What could be more emotional?
And from the pure investment point of view, gold plotted over 200 years from 1802 to
2002 increased by a factor of 4.5. That is $1 of gold in 1802 was worth $4.52 in 2002. This
compares with stocks and bonds increasing about 10,000 times in the same time frame, so gold
proved to be not much use here either. Temporarily, gold can have its up and downs depending
on supply and demand of gold-mine production and on other emotional factors – such as, in
current times, the value of the United States of America. When the American economy is bad,
people invest in gold and the value of gold goes up; when America recovers, people invest in U.S.
dollars and the value of gold falls.
Humans have had a long-standing love affair with gold. Mention a gold-strike somewhere,
and thousands stampede there with dreams of getting their hands on riches – and it has been this
way since the time of the pyramids, if not before.
One point of this paper is to suggest that you not waste your hard-earned money to invest
in gold. By its very nature, as the standard for currency, gold cannot go up in value (at least not
any more than the currency’s inflation) which remains at zero increase, relatively speaking. If you
attended our PMBA last October, you will recall that we told you that the house you live was a
poor investment1 and now we add gold to that list. Ooops! Sorry.
Somehow over the century of the 1800’s gold became the standard for finance. People
believed in gold. They could have believed in silver or cigarettes, but they chose gold. Countries,
one after the other, accepting this human leaning, adopted gold as the financial standard.
(Britain fought it for centuries opting to make silver, sterling, its standard – but ultimately the
most powerful country in the world at the time, caved in). And it is still that way today.
A gold standard means that every other form of currency reverts to gold at some point.
People have retained their insecurities about the value of other forms of money and so, nations
have reverted all the currencies to a gold standard, some with the promise that any time, you
could go to a bank and cash in your $10 note for the equivalent in pure gold. Subsequently, to
be good on their word, the banks (via central banks in each country) needed to have lots of gold
on hand – at least enough gold to honor the paper money run should there be some financial
malaise2.
So, at last, there is a use for gold: it sits 7 stories beneath ground level, thousands of tons
of gold, as the emergency (reserve) money supply, in every major country in the world.
Fortunately, gold is chemically inert so it won’t rust or decay; it needs no looking after.
But realize that this standard is a figment of everyone’s imagination. It makes us feel
good. If somehow money actually did collapse, there is never enough gold in any country’s
reserve to cover all the currency in circulation. It simply won’t work. But does anyone care?
Does it really matter? Probably not. (All the gold mined over the entire human history will make
up one cube of 30 meters by 30 meters today).
The point of this discussion is to reinforce the point that emotions trump logic – even on
a major scale such as with our economies – something we all worry about quite a bit. I, for one,
want to keep you aware that emotions often rule our logic, for events both big and small.
Bill
© W. E. Caswell 2015