I wanted to write this post after reading some of the responses to a suggestion by Robert Zoellick (who happens to be the president of the World Bank) that gold might have a role to play in determining the valuation of future currency or set of currencies that uses more than just the US dollar as the world’s reserve currency.
Just to be clear, this is his quote:
The system should also consider employing gold as an international reference point of market expectations about inflation, deflation and future currency values.
This quote has spent the past few days spreading like wildfire around the gold-loving and gold-hating parts of the Internet alike.
It immediately pissed off the world’s Keynesian economists, those who speak of gold as a “barbarous relic”, among other such things.
What really struck a nerve with me was an article today from the Financial Times entitled Zoellick’s call on gold standard dismissed.
So without further ado, I’d like to give you a quote from Fred Bergsten, director of the Peterson Institute for International Economics in Washington (and a devout Keynesian). I’m going to cut straight to the sound bite:
I happen to think that gold is a very poor reference point because it fluctuates so widely
This is where it becomes obvious that something is incredibly wrong (namely, the fact that Fred Bergsten and his Keynes-loving-buddies desperately needs to take a course in Austrian Economics, and/or find themselves a clue-stick).
Gold does NOT “fluctuate wildly”. What fluctuates is the price that people are willing to pay for gold, which can often be summarized something like this… the more insane the government spending and fiscal irresponsibility, the less faith people have in their government’s currency, and the more they are willing to pay for gold (or silver, for that matter). What is truly fluctuating is the value of the fiat currencies floating around the world which are backed by no tangible assets.
Just to be perfectly clear, take a look at this photo (sadly, I don’t have any $USD on hand, so Euros will have to do). There is precisely one difference between the “real” 10 Euro note, and the “fake” 10 Euro note that I’ve created on the back of a scrap piece of paper that used to be my grocery list. Here’s the difference: You have faith in the “real” 10 Euro note.
Without faith in the note, it is effectively worthless (as the 10 Euro “note” on the back of my scrap grocery list demonstrates quite clearly). But what about gold? Do you need to have “faith” in governments, central banksters, or loony economists in order for gold to be worth something? Heck no you don’t. You can take that gold to anyone, anywhere in the world and it will be money. Real. True. Money.