Martin touches on many of the concepts that I embrace. One of those concepts is that a single money cannot serve all purposes, as a unit of exchange and as a storehouse of value. As a unit of exchange it always must inflate through the creation of credit. In doing so, the value holding ability is impaired if supply expands faster than economic growth. But, if there is a competing form of money that serves to hold value by design while relinquishing the duties of unit of account and exchange, it can serve as competition for the saver’s capital. This is the essence of Freegold with gold serving as competition to the dollar for the saver’s capital.
Martin is correct in that money has no intrinsic value in itself, including gold. Money serves as a marker or a holding place that enables a barter transaction. The actual goods and services traded is where the value lies. Value of money cannot be fixed because supply and demand for money will always vary. So, money is indeed much like a commodity. Attempting to fix the price of a commodity never succeeds and only causes aberrations within the market that end up causing dislocations. The same applies with money. Money must be free to seek its appropriate value that market place assigns. The market must have the ability to choose what form of money serves the best purposes. Savers are concerned with capital preservation, while investors are concerned with capital growth at an acceptable level of risk. Consumers want access to credit at reasonable rates. Each must have a choice as to where their capital is allocated. A single money cannot serve all interests.
We need a reserve asset that cannot be inflated, gold. We also need a money that can be inflated to keep up with economic and population growth. The system is currently in place and ready to go forward minus a very important thing: gold is still be used as a fractional reserve asset and its supply is being inflated through the creation of “paper” supply. This paper supply is doomed to failure and will disappear when enough people demand physical gold to close gold transactions. Along with the destruction of this paper supply, the price of the remaining physical supply will skyrocket.
We are seeing this today with Venezuela and the re-repatriation of its gold from the Bank of England and various bullion banks. The banks holding the gold have long since loaned the gold out to be sold forward into the market. Now, Chavez wants his gold and those same banks must go out into the market and purchase the gold they claim to still hold. When they do so, the supply of gold will dwindle in the amount that is repatriated and will represent “paper gold” that no longer exists. Demand has not changed one iota, therefore price must rise. Ultimately for Freegold to be a reality, all the value held in paper gold supply must be transferred to physical supply. Once this is accomplished and further production of paper gold is prohibited, a second form of money specifically designed for the saver will be created. Capital will flow into and out of fiat into and out of gold as the market decides which form of money offers the best opportunity and risk profile.
Without further ado, here’s Martin’s latest: