Whither Gold

A good article with a glaring flaw it seems. Mr. Fekete makes a serious and common error when he says “gold is the only form of tangible wealth that can be lent out at interest and that is in constant demand as such.” It isn’t that this statement is false, it is in fact true. It appears that Mr. Fekete is ok with the production of credit through a gold reserve base or at least condones that activity. Producing credit through gold creates multiple claims for the same gold, which trade in the market indistinguishable from gold that is claimed by a single owner. This production of “false” or fictitious supply dilutes the value of gold in currency terms and is detrimental to savers in gold.

For gold to function as a store of value, it’s supply must not be flexible and determined by the production of credit. That is what fiat is for and is best suited, for use as a transactional unit and for lending. Gold is best suited for storing value and for saving. The answer is not gold or fiat, it’s both. The money concept requires both to serve independently doing the job both are best suited for. Dollars are for earning, buying, and lending. Gold for saving. This is the essence of Reference Point Gold RPG where the most suitable store of value is naturally selected by a super-organism (market participants) in pursuit of individual need.

Whither Gold

The prophetic words of Antal Fekete in his now infamous ‘essay’ on Gold are as relevant now (perhaps more so) as they were when he first wrote them 15 years ago – especially as the Euro-zone migrates from lossening fiat-money to quasi-money (greek pharma bonds for instance). While summarizing this must-read discussion of mainstream economic orthodoxy’s mis-teachings is impractical, his initial introduction sets the stage for what is to come: “The year 1971 was a milestone in the history of money and credit. Previously, in the world’s most developed countries, money (and hence credit) was tied to a positive value: the value of a well-defined quantity of a good of well-defined quality. In 1971 this tie was cut. Ever since, money has been tied not to positive but to negative values — the value of debt instruments.” After a brief, clarifying history of money, Fekete goes on to discuss the misnomers of currency depreciation, gold as wealth, the failings of kicking the can, quantitative easing, and finally in the misunderstanding of interest rates themselves – seeing them as nothing more than merely bribe-money, trying to persuade reluctant holders of irredeemable promises to hang on a while longer. Paradoxically, gold’s importance is growing while its dispersal from official hoards and the mines continues apace. Dispersed gold represents latent power, far greater in scope than its nominal market value, as sound credit can be built only upon a gold base.

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Log Scale chart of the price of Gold.

On Currency Depreciation:

Mainstream economic orthodoxy teaches that a depreciating currency is a boon to the country, and a valid tool in the hands of the government to increase competitiveness and thus to reduce or to eliminate the current account deficit. A debased currency makes the country an attractive place for foreigners in which to buy and an unattractive place in which to sell. Exports are boosted, imports curtailed; thus the deficit is narrowed.

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Terms of Trade for Seven of the world’s largest trade regions

This is one of the most pernicious doctrines ever concocted — as demonstrated both by theory and practice. Deliberate currency depreciation puts the country at a clear disadvantage, causing its terms of trade to deteriorate. As all items for export have imported components, no one can maintain for long low export prices in the face of ever rising cost of imports.

On Gold as ‘wealth’:

It is important for us to realize that every word of the doctrine on the sterility of gold is an outright lie. Not only can the owner of gold earn a return in gold on his holdings even under the regime of irredeemable currency, but gold is the only form of tangible wealth that can be lent out at interest and that is in constant demand as such.

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3 Month Gold Forward Offered Rate (Lending Gold On Swap Against the USD)

There is a lively gold loan market in the world: gold is put out in loans and is borrowed at interest on a regular basis. It is used in financing great capital projects as well as trade — in the same way (although not on the same scale) as it always did under the gold standard.

On ‘kicking the can’:

The term `redistributive society’, as it is used by both its protagonists and antagonists, refers to the redistribution of wealth and income — after they have been produced. More ominously, a movement to redistribute future losses is afoot. If successful, losses will be perpetuated and passed on to society. The scheme will allow the indolent, the inefficient, the inept, and the consistent loss-maker to continue in business indefinitely at the expense of the industrious, the efficient, and the profit-conscious.

On Quantitative Easing & Monetization:

The central bank goes into the open market and buys government bonds. As a result bond prices go up or, what is the same, interest rates go down. But the flipside of this is that now there is even more irredeemable currency in circulation. This cannot help but make the pace of currency depreciation increase.

The rational basis upon which bond values rest was overthrown when gold-redeemability of the currency was abolished. The fanatic denial of this fact is central to mainstream economic orthodoxy.

On Interest rates:

Under the regime of irredeemable currency, interest is merely bribe-money, trying to persuade reluctant holders of irredeemable promises to hang on a while longer.

A low and stable interest-rate structure, in particular, cannot be achieved without making credit gold-bonded. This elementary truth is now in the public domain, even though our universities have been somewhat tardy in accepting it.

And on the future of Gold:

Paradoxically, gold’s importance is growing while its dispersal from official hoards and the mines continues apace. Dispersed gold represents latent power, far greater in scope than its nominal market value, as sound credit can be built only upon a gold base. When the dispersal of gold reaches a certain threshold (nobody knows where exactly this threshold is), a metamorphosis of money will take place. Gold will reclaim its throne as constitutional monarch in the monetary and credit system of the world.

Charts: Bloomberg

Whither Gold

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