Just Like Now, Only with Real Money

Gold: It's foolish to ignore 5,000 years of monetary history...

MY MY MY, writes Dan Denning in the Australian Daily Reckoning. Articles ridiculing gold are starting to pop up all over the financial media.

What gives?

It's nice to see the media actually discussing Gold. But what's a little disturbing is how poorly understood gold's historic role in the financial system is. What's more, doesn't anyone know what sound money is any longer?

Our burden today, then, is to remind these nattering nabobs of negativism that gold is not anyone else's debt. It is not anyone else's liability. It cannot be created with a few keystrokes. And for thousands of years, millions of people from all walks of life have been happy to use it as money because of its unique features (divisibility, durability, scarcity, difficulty in counterfeiting).

Gold is a commodity. But its price is not driven exclusively by the Indian jewelry market or investment demand. As a tangible commodity, gold has some of the aforementioned qualities that make it a fantastic medium of exchange.

And for people who trot out the canard that you can't buy a Big Mac with Gold Coins, what do you think goldsmith's notes – the original bank notes – were? They were receipts that indicated gold ownership and your ability to pay a debt. You could exchange goldsmith's notes as payment for goods and services because the paper claim was backed by a real asset. Goldsmith's notes were the precursor to bank notes. Same type of system as today, only with real money.

Is this all just some nostalgia for a financial system that no longer exists? Does gold have a real role to play in the future financial system? Well, Gold is a threat to the fiat money peddlers from the warfare/welfare State because it exacts a heavy price for deficit spending and money creation. The expansion of credit or deficit spending is always possible in a fiat money system, and it thus placates voters with false prosperity borrowed from the future.

The rise in the Gold Price, therefore, is telling us that markets are increasingly suspicious of government-backed money and its ultimate affect on the real economy. Or, as Greg Canavan of Sound Money, Sound Investments says:

"Gold is saying that the crisis is not over, that it is in fact getting worse. We are seeing Gresham's Law in action, as bad money pushes out the good. Gold is being swept off the market by millions of individuals who know that without fail governments always ruin the value of their paper money."

The only real – albeit shallow – criticism of the gold story right now is that it's primarily a US Dollar story. For Aussie investors, a collapsing greenback doesn't equate to a higher Aussie-dollar Gold Price. We would say, though, that this is a short-sighted appreciation of what gold is saying about the modern money system.

The modern money system is built on credit, debt, and government money backed by nothing. To believe that does not mean you'd covert all your assets to bullion, or all your shares to Gold Mining stocks. But it IS to believe that the architects of this system are criminals who effectively steal your wealth through inflation and control of the money supply.

If you have confidence in that system, you're a sucker. And if you don't hedge against its collapse, you're unprepared. After the last two years, is it so farfetched to believe that the foundations of financial capitalism – based on unsound money as they are – are weak by design and will fail in a world of increasing complexity and interconnectedness?

If you don't think it could happen, you haven't been living on Planet Earth. Either that or you're in a business where you want everyone to go back to doing what they were doing pre-Lehman collapse because it's good for your business. If that's the case, it's fine. But it's foolish to ignore 5,000 years of monetary history.

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