Gold: Pure Money
Is gold money, an investment, a hedge, or an insurance policy...?
GOLD REMAINS YOUR ULTIMATE dollar hedge. Viewed as such, gold money is the only global currency that is no one's liability. Indeed, gold is "pure money".
As such, gold has always provided a kind of insurance, first and foremost, for savers and investors whatever their local currency. Gold money, if we view it as such, is not an investment per se. But when economic uncertainties mount, buying a bit of gold "insurance" can prove a terrific investment.
"If gold isn't a bargain, what is it? It is a hedge," says Jim Grant, editor of Grant's Interest Rate Observer. "However, in my opinion, it is a hedge bargain. The value of a hedge should vary according to the cost and evidence of the risks being hedged against.
"In the case of gold, the risks are monetary."
How to put a value on today's Gold Price as an insurance policy, as gold money hedging your Dollars and investments? The abandonment of the gold standard in 1971 was a crucial turning point in the US – and global – economy, a decision that has been gradually destroying the power of the United States ever since.
The excessive printing of currency that followed the break with gold money led directly to the trade deficit, and once the surplus turned, it never went back. It aggravated the condition of the national debt and allowed the Fed unbridled access to printing presses, the condition in which we find ourselves today.
The lesson not yet learned has everything to do with the reasons why the gold standard was so important. We have given control of economic forces over to government tinkering.
Ludwig von Mises, noted twentieth-century economist, was a believer in allowing market forces and not government to determine monetary policy. Mises argued that because money originated as a market commodity, not by government edict or social contract, it should be returned to the market:
"Banking should be treated as any other industry in a market economy, and be subject to competition."
In one of his many writings, Mises correctly observed, "The significance of adherence to a metallic-money system lies in the freedom of the value of money from state influence that such a system guarantees."
This is the crux of the monetary struggle of our era. With all governments now off the gold standard, the market itself is not trusted to set the course of value in the exchange of goods and services. That is why, ultimately, the destruction of the Dollar is inevitable.
Governments – including the US government, along with the Fed – have not yet learned that the economy cannot be controlled. But as Mises explained, it is not just monetary policy but part of a larger social trend that has brought us to this moment:
"The struggle against gold which is one of the main concerns of all contemporary governments must not be looked upon as an isolated phenomenon. It is but one item in the gigantic process of destruction which is the mark of our time.
"People fight the gold standard because they want to substitute national autarky for free trade, war for peace, totalitarian government omnipotence for liberty."
If all of this is true – and from the economic news of the past few years, it appears so – what can you do to turn this situation into an advantage? The answer is to use free market gold to exploit the market tendency of gold itself.
Remember, once governments are off the gold standard, the Gold Market cannot be controlled. It is worth whatever people will pay. As long as you understand what causes the price of gold to move, you have the key to investing success.
That key is: The Gold Price tends to move in a direction opposite to the value of the US Dollar. Hence gold's money value. It measures and counters declines in non-gold money substitutes.
With this simple observation, we can track the value of gold and the value of the Dollar together to see how they interact with one another. From 2000 through 2006, the Dollar fell and gold prices rose. As the Dollar continues to fall, it makes sense that gold will move upward in direct response. We could explain this by noting that value itself is not created out of nothing; it simply changes hands. So as value goes out of the Dollar, it can be measured by watching other currencies rise, but it can also be measured by watching gold prices move in the other direction.
As the Fed continues to keep the printing presses running around the clock, the Dollar continues to weaken. The problem is not entirely visible because, even with its gradual decline, the Dollar has remained strong. This has been so partly because China's currency is pegged to the Dollar, but also because in many respects, the United States continues to lead economically in the world.
However, the trend in economic growth tells us that this cannot continue indefinitely. It is economic common sense that currencies tend to be the strongest for those nations with superior economic growth.
If you understand why it is important to invest in gold as a defensive measure against the declining Dollar, the next question is where to invest. You have many choices.
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