But if you purchase an oz of gold In 1930 put.it.in a desk draw along with the approximate 30 dollars you bought it with in a second draw which would you rather have in 2014. The currency or the oz of gold. Gold has been and is the best hedge against inflation. Wages would be renegotiated but how about fixed income or savings erosion? If your savings were in gold you woudnt need an interest rate in a savings account.
Do Option Sellers Have a Trading Edge?
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But if you purchase an oz of gold In 1930 put.it.in a desk draw along with the approximate 30 dollars you bought it with in a second draw which would you rather have in 2014. The currency or the oz of gold. Gold has been and is the best hedge against inflation. Wages would be renegotiated but how about fixed income or savings erosion? If your savings were in gold you woudnt need an interest rate in a savings account.
Fiat has no intrinsic value so it makes no sense whatsoever to compare it to gold. The real value of fiat lies in the purchasing power it gives. Gold on the contrary is a commodity. It's price can easily be explained from fundamentals. Inflation hedge? Then why did it decline from 1800 to 1250 in the last one and a half year? Inflationary fears have never justified gold ownership, on fundamental basis or on a question of investor sentiment.
Your example is moot because you could replace gold with any asset really and get the same result. If you bought a house, some barrels of oil, some gas, you wouldn't need any interest savings account either. However you'd expose yourself to a completely different set of risks than if you simply collected interest, rent, dividents, anything with positive cash flow. That's what most would prefer.
IMO it makes no sense whatsoever to complain about savings erosion - I mean, you're putting all your wealth in something that has no intrinsic value and was never meant as a store of value to begin with, then when your investment fails you turn around and blame the government? Please. Fiat never has and never will be a store of value. It was meant to circulate, not to be stuffed in idle mattresses.
if the governments of the world debase this currency far enough people demand more dollars euros whatever for goods and services. or they would demand gold something that has been used as currency for 2000 years. either way gold the commodity will represent the increased supply of dollars at a fixed rate.
Gold, a commodity, can only be mined not created, therefore its supply is fixed to the mining rate, not a governments' will.
It declined due to the fact that inflation was not realized to extent that the gold price had risen. dare i say a bubble on people's fears. Kind of like how sometimes implied volatility becomes very high compared to the realized vol of an underlying, where you sell the high impl vol and realized a profit edge or whatever.
many People where fearful (or speculating) of failing banking systems or whatever and hedged their buying power by buying gold a commodity, that can not easily be manipulated. Should gold be worth 1800 no, should it be where it is...i'd say yes.
You could buy any commodity, yet barrels of oil are not easily stored in ones safe or house and can not easily be traded in times where the government is printing zillion dollar notes. Why was it once ILLEGAL to own gold in America? Because it is the perfect commodity to hedge fiat currency with. Govt needed the ability to debase the currency as they are the first to use the money.
yes fiat currency is not a store of value due to inflation...yet gold is the hedge against that if you wanted to store your value in a commodity that is easily stored in ones mattress safe or whatever
And what is money exactly, Einstein?
Or, if you prefer, since you are playing dumb, what is the value of 1 US dollar (or 1 Euro)?
What is 1 dollar exactly (beside being a piece of paper with some Illuminati symbols on it, of course) ?
I roll eyes every time someone tries to reason what gold should be worth. Gold is worth exactly what it is worth at any given moment in time because the market says so.
Therefore, to say $1800 is 'overvalued' as you stated in ludicrous. When it was 1800, it was the right price at that time. If gold goes to $10,000, it will be the right price also.
There is no fundamentals about gold. So trying to justify whether gold is under- or over- (yes I said OVER also for you bears) valued is ridiculous.
For example, roubini calling for $1,000 gold is a hack job academic, as is peter schiff calling for $5000 gold. But, at least we know peter schiff is just talking his own book here. With roubini, he is just annoying and trying to get attention.
Just because you want things to be priced in gold don't mean the world wants the same. Gold-bugs are not the center of the universe, nor do you know everyones wants and wishes. Most people are fine receiving their wages in fiat, because they can easily be re-negotiated should one feel the purchasing power is declining. And if the "people" really wanted gold as you say, why aren't we seeing unofficial gold currencies pop up everywhere? Instead we got Bitcoin, backed by absolutely nothing. The truth is, gold bugs are few and far inbetween, yet they constantly claim to be representing "the people". Here's another question, do you really believe a gold backed currency can not be manipulated like fiat? You do know the vast majority of the worlds gold is controlled by a few hands? Banks own a very large share of it. In addition, unless it's 100% fractional, it would still function just like any fiat based fractional currency, because the reserve ratio can be chosen arbitrarily.
And what the value is or should be, wasn't really my point. My point is, if it's a hedge on inflation as you claim, why is it so uncorrelated with inflation? Did we experience some huge deflation I don't know about, since gold went from 1800 to 1250 in the last year? That's the point.
Certainly, oil barrels are not liquid. But you think gold bars are better? Carrying around a bunch of gold everywhere you go is not a feasible solution. And how do you pay, say an internet transaction, with a bunch of gold bars? Do you ship the bars to China first in exchange for your goods (essentially doubling the transaction time), or do you write an IOU note on a piece of (preferribly electronic) paper? If so, it's essentially fiat all over again.
The reality is, money has always been fiat. Even if it's tied to gold, it's still fiat. It was fiat in Roman times, fiat in Byzantine times, fiat in every great civilization and economy in the world, from Asia to Europe. Why? Because if a government recklessly prints fiat, there is nothing stopping it from doing the same with gold-backed currency.
If the amount of a gold-backed currency that is minted can be limited by law to the arbitrary amount of gold held in reserve, then the amount of a fiat currency that is minted can be limited to any arbitrary amount. Just pick a number.
Again, the face value of any fiat is meaningless. The value lies in whatever purchasing power it gives people. It's actually very simple when you think about it, and if you stop confusing it with a store of value.
If a currency is backed by a physical commodity such as gold or silver, then it is by definition not a fiat currency. Anyhow, the weight of human history is on the side of the gold bugs.
A good read is "The Creature from Jeckyll Island." I am not as conspiratorial as the author, but I think a return to the gold/silver standard and a move to fee banking instead of fractional reserve banking would be better over time for our society.
It doesn't matter because they function the exact same way as long as it's fractional.
Pegging the entire world to gold sounds like a great idea to create a huge correlated mess. It's much better that countries be left to their own to choose and print their own currencies as they see fit, and in a manner that suits their own unique economies. Then you have a free floating exchange rate between them, that buffers business cycles and means one country can go through a recession without neccessarily affecting anyone else. This is in fact one of the major reasons countries like Greece have so much trouble, because they barely have control over their own currency anymore and instead they have a serviliant relationship with Germany, just like anyone on the gold standard would have to the mining companies or banks that hold the majority of the gold.
Severance of currency from gold or silver is the best thing that ever happened to mankind IMO. Now every country can prosper if their human capital is put to productive use and it is the value of goods and services produced by the human capital brings value to the money - not some shiny metals. All currencies now function as a "commodity" and the demand (thus value) depends on how much the sovereign country produce in goods and services.
The only entity that benefits from the printing of fiat currency is the government who printed it as they are the first to use it in the monetary system. The only thing that would happen if the govt couldnt print money would be that the govt would have to raise taxes or go bankrupt. No more monetizing the debt. Inflation is the tax on savings and capital the life blood of economy.
The reason greece is in trouble is due to their out of control entitlements that they can not monitize. They could raise taxes but who would be able to pay?
And that was PRECISELY my point when I said that the dollar lost more than 97% of its value (buying power) since the FED came into existence.