RINF Alternative News
As gold broke below the psychologically important level of $1,200 an ounce late in December of 2014, the mainstream financial media burst with headlines like this one fromMarketwatch, “Gold’s Safe-Haven Role is Over“. The Noble prize winning economist from The NY Times, Paul Krugman, penned a wicked missive on the ‘barbarous relic’ by invoking Keynes and the absurdity of miners going to “great lengths to dig cash out of the ground, even though unlimited amounts of cash could be created at essentially no cost with the printing press.”
The basis of a vibrant and dynamic society is an open and free marketplace where people ‘vote’ with their decisions on where to spend money, where to live, what to read, who to vote for, etc. In the United States, a good example of what occurs when decisions are centralized is healthcare and education– the key decisions are made outside the mainstream of the marketplace and the country ranks far below the rest of the developed world, even behind countries with considerably less economic wealth. As central planning and regulations remove potential players and solidify the positions of special interests, the quality of education and healthcare has plummeted.
So what does this have to do with the price of gold? Everything.
What is Money?
Gold is money. Federal Reserve Notes are not money on one important score; they are a poor long term store of value. One ounce of gold in 1938 was worth just about $35 and a new car was worth $860. If a new car dealer took the money from the sale of a new car in 1938, converted it to gold and gave that gold to his new born son, when the boy turned 75 in 2013 he could have bought a brand new Toyota Camry with the gold his father had given him. If instead, the father had given him the cash, he could have gone out and bought himself a fancy new bicycle with the dollars he’d held on to for 75 years.
If the old man, feeling flush, tossed in an extra ounce of the ‘barbarous relic’ for gas in 1938 his son could have bought about 350 gallons of gas for the ounce of gold. If the kiddo had held on to the gas money in the form of gold, he could have, in 2013, bought almost the exact amount, 360 gallons. But if the youngster had made the mistake of converting his ounce of gold into dollars, he could have, in 2013, bought a good bottle of Spanish wine with the Federal Reserve Notes he received in 1938 for his ounce of gold.
Money is a means of exchange, AND a store of value. The dollar is a great means of exchange but it’s a pitiful store of value.
In essence, money is work. If someone wants to sell 1,000 kilos of wild salmon for $10,000 he might find a few buyers who, if they wanted to proceed, would ask about delivery. If the seller pointed toward the cold waters off the Alaskan coast and indicated that the fish were out there swimming around, he wouldn’t have any buyers at any price. When someone pays for fish, they are not paying money for the fish, they are paying money for the work involved in finding them, catching them, and transporting them to market. Money is a means of exchange- the fisherman exchanges his work (the fish) for money and he uses the money to maintain the value of his work and later exchange it for the work of others. That is money for the working man.
The Sucker, the Conman and the Shill
Imagine the fisherman decides he needs a new boat and wants to finance the entire purchase price. He will go to his local bank and, if approved, will be given the funds to purchase the boat in exchange for signing a promissory note for the amount and terms of the loan.
When the fisherman signed the promissory note, he assumed that other fishermen, or their equivalents in productive society, worked, earned money, deposited that money in a bank to earn interest and that’s the interest he was going to pay on his boat loan, plus the margin for the bank. The interest rate he was paying seemed reasonable, 7%. The guy who deposited the money needs a return, and so does the bank. In fact, it seemed cheap to him. He probably wouldn’t continue fishing if the best he could do was make what the bank or the depositor made, say about half of his interest rate, 3.5%. For that, he would sell everything and buy a ten year bond that paid close to 3% and call it a day. But he’s not a banker and he assumes they’re making money some other way.
The banker is thrilled. He did take some deposits and put them in reserve (about 10% of the loan amount) and he will be paid interest (.25%) on that amount by the Fed. Then he created, out of thin air, the entire loan amount to give to the fisherman. The money he gave the fisherman never existed before the fisherman signed the promissory note. The banker is making more than 70% on the money he has left in reserve, for which is also earning interest. Worst case, if the fisherman goes belly up, the banker will sell the boat. He can’t lose much.
The PhD Nobel Laureate, writing for a one of the world’s great newspapers, never a word he speaks of this, for if he did, only for Zero Hedge would he write and not a penny would he see for his poetic prose. So instead he writes about Democrats and Republicans and higher taxes on the fisherman to pay for the bigger deficits he is so fond of. More deficits, more debt, he exclaims. Just print the stuff like it’s going out of style and we’ll all be living high on the hog.
The fact is, only the fisherman actually does something worthwhile for society, while the banker stuffs his pockets and the PhD stuffs his ego while filling the masses with fantasies.
So what does this have to do with gold going below $960? Everything.