Gold’s 'Grand' Illusion

Imagine that you, the reader, are aboard a private jet with George Soros, Marc Faber and Jimmy Rogers, headed for a gold symposium in Darwin, Northern Australia. Your plane crash-lands on an island in Indonesia. You seek out the local chieftain, who controls all the food on the island. You tell him that you are in desperate need of food and he asks what you have to trade. The three amigos each have gold bullion and you, as I typically am, are in possession of two fives and three ones.

The chief indicates that he has no need for paper and that gold is too soft and too shiny for arrowheads and as it attracts the attention of tigers, rendering it attractively unattractive as ornamentation goes. Additionally, he indicates that due to the energy required to transport it, he has no use for it, and that the local currency is pigs. As George, Marc and Jimmy’s luck would have it, the chief later recants slightly: It appears after some contemplation that he would like a tiny amount of gold to make a trinket for his wife, in light of the tiger theme, but none for his girlfriend. But, he tells the four of you not to worry as there is plenty of work to do and he believes that they may have actually had some leftovers available, once.

OK, so what’s the point?

The point is this: when things get really nasty, gold is, well...how does one say this diplomatically…um…worthless. You dang sure can’t eat it. So why then would one invest a thousand dollars of his or her hard earned money for a gumball sized nugget of it? This is the little gumball were talking about, the one that loses its flavor in about 15 seconds, assuming normal chewing, and not the jawbreaker size.

Gold is typically a scarce metal versus jewelry demand and has relatively limited industrial uses. At the height of the internet boom when we were creating a millionaire a minute (think jewelry purchasers) and what small uses gold has industrially (think conductants), gold was selling from $250-$450 an ounce. Somewhere therein was gold's perceived intrinsic value versus jewelry and industrial uses.

Occasionally, as now, gold is viewed as a hedge against inflation and/or a hedge against uncertainty: On inflation, Gold is up about 42% per year since 2001 with US inflation somewhere between 5 and 9%, making gold light years ahead itself as an inflation hedge. If one is buying gold for this reason, then one is buying an asset that has appreciated 300% since 2001 to hedge against 5-9% inflation annually. Gold hit $850 per ounce in the mid eighties and $250 in 2001, so, as inflation hedges go, something is out of whack here! Common sense wise, it would appear a better proposition to be selling gold, given the data.

Per gold as a hedge against uncertainty, if things get really bad, gold may lose its shine, so to speak. Both Hyperinflation and Hyper-deflation suggest major economic turmoil. Hard assets in hyperinflation, yes, gold, I’m not so sure! How does gold become currency when there is so little circulating gold and how is it’s value determined? I don’t see jewelry as particularly glamorous as a bread line fashion statement, except to attract tigers of another sort. Worse yet, hard assets in times of deflation spells broke.

Additionally, what if, at the moment, real estate, stocks, commodities and soon bond prices (as rates must rise) are falling. Oh, wait a minute, they are! Assume for a moment that food prices are rising at a micro level, but that is simply a lag effect of past increases in the money supply. What if at the macro level they are falling, which will filter down as all commodities continue to drop, as world economies slow dramatically. What if we have already had inflation and things are now deflating. Perhaps wealth is and will be destroyed faster than money is created.

The USA Today posted an article on 13APR08, indicating that in 2001, then Federal Reserve Chairman Alan Greenspan, lowered interest rates to 1% because he was concerned about deflation. If deflation was a threat then, we are now in big, big trouble. Perhaps that is why Uncle Ben is so panicked at the thought of the trillions of dollars worth of derivatives all set to implode at any minute. Relatively speaking, who is left to borrow the $2B per day needed to keep the gravy train rolling, following seven years of free money turbo charged by derivatives? And, isn’t the deleveraging of hedge funds that caused the recent 10% pummeling in gold prices actually deflation?

What if gold mania, like tulip mania, is all imaginary and fueled by collective energies? After all, gold has very little intrinsic value! It is simply ornamental because we have collectively agreed that it either looks cool or implies status, and when most of us are not starving. Gold mania, plain and simply, feeds upon itself. Folks jump on the gold train as it begins to move and more and more folks pile in until it can no longer budge. The problem is that nobody really knows how much steam the engine has because the steam is all of our collective imaginations. The steam is pure illusion making gold's movements even more transparent than with most other investments.

However, the known entity at the moment is that the track got real steep and/or the train got real heavy at around the 1000 foot mark, in the face of massive uncertainty (Bear Stearns (BSC) potentially taking down the entire global financial system), and is now around the 900 foot mark, metaphorically speaking. It looks to me at least that something around $1000 an ounce is the max folks were willing to pay as a risk premium for virtually unlimited uncertainty. Knowing that, folks are now exiting the train. Curiously, I’ve read a couple articles of late, in reputable publications, that the IMF is evidently considering selling vast quantities of gold.

In this sense, trying to convince folks to remain on board a train heading down the mountain, in hopes of eventually getting them to the top, when the very real threat of an implosion of the entire world financial system could not get it above the $1000 mark would appear misguided. “Um, da y'all give any king of refunds or anything like that, cause I got on here at 975 expecting to ride to the top and we seem to be going backwards?” Sorry sir, but you ride the bubble express at your own risk!

When the pendulum really starts to swing, I think I am going to fill half my house with canned goods, dry goods and peanut butter so that when the new currency is known, I can just trade for it, in case it's pigs or something. Sounds ridiculous doesn’t it? Except for the fact that this is precisely what his happening with wheat in Egypt and rice in Asia at the moment, otherwise known as hoarding. It would seem to me at least that when things get really ugly, the guy with the food dictates the value of gold and not the other way around. Just call me chief.

Disclosure: I have no gold or metals positions of any kind

Comments

[john2]

didnt you write this same article before? or did someone write one just like it in any case all gold is money no matter what. it might as well be euro or dollars or yen it is the ultimate currency of this planet to exchange it to gold would be to change it to something material and that will not go down in value as the planet gets worse. just wait for inflation to set in and the dollar to drop even more. thats all the reason people need to invest in it.

[maverick]

If things get that bad it won't be the people with the food in control, it will be those who have guns and ammunition.

[fxtrader07]

you have a point, actually you raise a couple of valid points, certainly. However, you fail to see what makes gold so unique. Gold is not seen as the ultimate store of wealth because some moron at some idle day declared it to be. It's scarce enough that it cannot be found easily in the park, it's almost undestroyable, at least by natural forces (don't throw it into a volcano or bath it in some very aggressive acid, of course) - so it cannot be created at will nor will it disappear on a rainy day. And make no mistake: all things carry value only because opf people's imaginations that they are valuable! A bushel of wheat, for instance, will be worthless the moment people get convinced that it is hazardous to one's health to eat it.

You cannot eat gold, that's true, but you will have a hard time trading your stored grains in a time of complete turmoil. chances are, you need your own little army to simply defend your castle not to speak of driving through the countyside with a car full of wheat. and of course, you better hope that these hard times last not too long before all you wheat has rotten. the point is: regardless what govts say and do, you will alway need a reliable means of exchange and gold and silver are the closest matches. I would never keep more thann 20% of my little wealth in physical gold and silver , as these metals will likely appreciate below inflation all the time - unless the full crisis hits and then they go vertical - in a digital-like move from x to several times x. IT's an insurance- and who expects his insurance to appreciate? If the big meltdown doesn't come for another 50 or 60 years (I don't see, though, what could prevent it from happening much earlier than that) then gold as investment will do pretty bad (silver might do quite well due to its commodity status and many industrial uses). So you better had not put more than a certain fraction of you wealth into physical gold and silver. However, when the day of reckoning arrives you will be glad you had that 10 or 20% of your wealth stored in bullion.

[fxtrader07]

oh, and by the way. you wrote: "When the pendulum really starts to swing, I think I am going to fill half my house with canned goods, dry goods and peanut butter so that when the new currency is known, I can just trade for it, in case it's pigs or something."
AH! how do you know, when the pendulum really starts to swing? What does tell you, that it hasn't already started and that now wasn't the time to load up on your canned goods? See, the moment people start to realize it, hyperinflation will set in from one minute to the next and you will barely be able to buy a bag of wheat with your paper money, not to speak of filling up your house.
And some guy recently commented on a similar story and summed it up nicely: in such turmoil-days those who are mobile and have arms and ammo to defend themselves are much more likely to survive than those who lock themselves up in a castle hoping to wheather the storm there

[Ulisses]

The author uses inflationary bullet points to suggest deflationary moves. Sure, deflation spells a colapse in gold, however and as the author himself points out, inflation has been running between 5-9%, depending on who one asks. My guess it is closer to 9%, rather than 5%. Got Gold?

[The Fitzman]

certainly if one is hungry, a big is a better bet than gold. and, as someone else pointing out, in times of true upheaval, perhaps lead (for bullets) would be more valuable. that said, you seem to marginalize the positives of gold:
1) it has outlasted all other currencies (wealth you can depend on)
2) easier to keep and maintain than pigs
3) when even the best supplied person runs out of food, and wants to make a trade for someone who has food, other than perhaps gasoline, gold may be your best bet

remember, after the civil war it was gold coins that allowed scarlett o'hara to keep the farm. but alas, if the US government, media, and citizenry don't come to grips with peak oil and enact a REAL energy policy, it will be the people who control oil and gasoline that will determine who gets what (or doesn't get what). that's why ultimate security depends on the american people wising up and pushing our idiotic "leaders" into action. here is a good start:

seekingalpha.com/artic...

with the note that, as someone pointed out, i neglected to list geothermal as a good source of alternative energy.

[The Fitzman]

correction: "big" should of course been "pig" in the previous post...my apologies.

[gaucho]

The author is still thinking that the US is the only driver of gold prices. China and India each out strip the US demand for gold. This is where he is all wet. If the dollar continues to fall gold will be priced on a world demand basis not a US only bases. Many parts of the world are undergoing an inflationary spiral China India Europe etc. Many people in these countries will contune to hold gold as an inflationary hedge.
If the US does go into an inflationary sprial themn this will add fuel to the price of gold. You get a double impact of an inflationary US environment while the dollar continues to fall on a world basis.

Guys like the author can reason himself into a corner.

[themicrokid]

Very good article. You have hit the key points. The person who committed on guns and ammunition as being stores of value in an unstable world is on the right track.

You are clearly going against the established grain. Columbus also fought the establishment who thought the world was flat.

People don't understand, GOLD WAS NEVER MONEY! It was only accepted as money and the acceptance of it as money makes it defacto money. Gold coins are money, but the operative word is coins. But GOLD IS A STORE OF VALUE.

[ptownman]

Look, anything and everything can be money just depending on the circumstances. Gold and Silver have been used as money for a very long time. Read, A HISTORY OF MONEY AND BANKING IN THE UNITED STATES from colonial era to world war two. The two medals are a medium of exchange that are hard to duplicate but a hella-va lot better than paper. All commodities are money, that is part of the reason they all have gained against the dollar in the past five years along with supply and demand. Would you rather have to haul 90 bushels of wheat to a store to make a trade or 1oz of gold. I was once ask the question by a UBS broker if I were a gold bug. My answer was if you and I were the last two people on this planet and you had all the gold and I had all the water who has the best of it? Having said that I bet the broker wishes UBS had put their money in gold in the past 5 years instead of MBS'S, CDO'S,
CLO'S etc. etc. and the tribe on the island would like a little fresh water every now and then.

[paraaga]

Basically it all comes down to the same thought - Gold is worthless and is a hype like tulip mania. I have seen so much of this recently that I want to take a different tack on this.
If it is worthless, then why do all the central banks own so much of it? Even the US Mint owns so much of it. It could as well sell gold at this "very high" price and get cash to put in something more useful like oil, corn etc. Can someone call them soon?? Think about it a little deeper. I don't want to go into a lengthy explanation here.
Further, the basic premise that gold is useless stands opposite to the historical view and also scientific view. Gold is the best conductors of electricity (better than copper), is the most malleable and hence can be used (and is used in limited quantity) in industries. The only reason why it doesn't get used so much is because everybody(including corporate america) thinks its more valuable than that...
Enough said I think for now.

[NI123]

It seems to me that the author has almost no idea what he is talking about.

[Hugh]

if gold id a 'Grand' Illusion," it has been a grand illusion for 5000 years. I doubt a poorly thought-out and poorly written hit piece will change that fact.

[your_avid_investor]

This article is written from a US economic perspective and its impact on gold. Just like price movement for ag and oil, we are no longer in a world where the world's biggest economy alone can move the price of gold. I can't see how gold can be considered an illusion when the global supply/demand side from future (and even present) economic powerhouses such as India, China, Brazil and Russia is not even remotely addressed (in this argument). I have noticed that a lot of the gold bears out there will argue their point of gold being worthless by setting a stage of an imminent apocalypse/doomsday, where the leaders are savages and the national currency is pigs (see above article). At this point I am begging for a bearish article on gold that just deals with facts and figures. Those are far and few in between and this just makes you wanna buy more gold, or look at gold under $900 as a great opportunity. Imagine gold under $850. That just screams for a doble down. How about under $750. If I was to triple down on anything in this environment ...

[cheapybob]

Chavez or another country disenchanted with the confetti paper dollars will buy all the IMF gold they want to sell, and that will be the end of that argument. The dollar has no where to go but down further, IMO, until the real budget (ie including the war and SS money) and trade deficits end.

[MikeW]

Gold, guns, and gasoline. The three G's of troubled times.

I guess if times really get tough, and public sanitation breaks down, my
gold will be useless in the outhouse, while your paper money
will still come in handy.

[Malkiel]

Robert Lichello, the author of various books on investing, told a good anecdote from his days in the army in occupied Japan where he found that gold and money were worthless, that only chocolate, booze, and cigarettes had any barter value in a country whose economic and agricultural infrastructure was destroyed.

If we look at the behavior of gold prices in the last 2 years we see that every big market downturn has brought a decline in gold price, not a gain, because most of it is owned in leveraged form and gets sold to meet margin calls. And now that inflation is rearing its head again, the price of gold is slipping. The gold bugs run out of excuses to explain this stuff; some day in the future a critical number of gold investors are going to wake up in the morning, decide it has no particular value, and sell it never to buy again. When that happens, the long night for the gold bugs begins...

[erx]

Yep - The commodity you want to own if things get really bad is not gold, it's ethanol (booze).

[NI123]

Actually, the best commodity to own during extreme economic hardships is practical knowledge - the more you know on a variety of subjects, the more useful you will be to your neighbors. Learn how to distill alcohol from corn, repair everything possible, grow your own food, hunt, etc. And, of course, it would certainly be wise to own a few guns and some ammunition. Those who claim that gold's value is entirely imaginary just like paper money are correct with one exception: gold has been a form of money for thousands of years, and I doubt that will change any time soon, if ever. In a doomsday scenario, gold and silver will be the last thing on people's minds as they struggle to eat and maintain shelter over their heads, but the barter system will only last so long, as a unit of monetary exchange always becomes a practical necessity in time. That unit will, more than likely, be gold and silver.

[bdograleigh]

The only problem with your argument is the rest of the financial world disagrees with you. The IMF requires all countries to contribute 25% of their contributions to the IMF in gold. The IMF is selling gold because they have serious financial issues. Our fiat currency experiment over the past 36 years appears to be coming to an end. The bubble is not in gold, silver, or other commodities, the bubble is in dollars. The dollar bubble is driving up the price of all of these items. Prices will go back down when the dollar strengthens. This will happen when the fed slows down the printing presses, which the fed is resisting because the banks will go broke. My personal favorite investment right now is wine land, an everlasting supply of booze!

[MikeL]

Paaraga, I like gold's unique properties, but I do not like non scientific people like yourself continually spreading the myth that "...Gold is the best conductors of electricity (better than copper),..."

In fact, copper is a substantially better conductor that Gold, and Silver is a much better conductor that either one. Silver in fact, is the best conductor amongst the pure metals, precious metals, semi precious metals, or base metals.

www.myhrsb.ca/Function...

[marc822]

"When the day of reckoning arrives..." as the author wrote, the standard will be gold and any new currency that may come to replace the dollar will be backed by gold. I believe the dollar is deliberately being allowed to tank and gold to rise so that we can eventually replace the dollar with a new gold backed currency. So he who has the gold will have the edge on the new economic order.

[User 178163]

Why isn't anyone else of the opinion that if a means of exchange is priced in terms of a commodity that it's value will go up when the value of the commodity goes up? Basing USA fiat dollars on the housing market seemed to do the trick for the strong dollar policy. Why won't scarce food do the same thing for a strong gold policy? Do we all really think we will have more gold to eat than food; or to put it in another way, that food will be more scarse than gold?

[User 30121]

Puhleez stop with the reprinting the same stale article rehashing why we shouldn't invest in gold. If you don't think its a good idea, get the hell out of the way, because your blocking the rest of us from getting our fair share! As for being on a plane with Soros. As soon as the aircraft reached crusing altitude, he would be given his "flying test" by shoving him through the first (open) door!!!

[mark mchugh]

Dan,
It's rare for me to really enjoy an article with an opposing viewpoint, but I did enjoy the article. I must admit, I even would have agreed with the viewpoint until about two years ago. I see what I call "currency wars" on the horizon. Where all the central banks are going to try to manipulate currencies to their advantage. Sooner or later, someone, somewhere is going to demand payment in gold.

and that's where the fun starts...

[guy23]

Fine. Sell your gold. To me. I have some nice colorful paper for you.

[L-bow]

Mark McHugh, Very much appreciate the compliment. I remember your input earlier on my comments to another article. What a wonderful means of exchange this is to be able throw ideas out there and see what comes back. I certainly do not claim to have any lock on the truth, and I really hope nothing I say dampens anyones day. I'm just like everyone else, just trying to figure out where to go from here, in spite of all this uncertainty. Have been thinking (too much) about inflation and gold, and decided to put some thoughts on paper and then test with you all. Goucho is probably correct about me reasoning myself into a corner, that's hilarious.
Publishing on here, provides a real education with the great variety of responses from some really smart folks. I enjoy and learn from the negative replies as much as those who tend to agree. Remarkably, they have all been very good spirited about it. I hope you all get rich and live happily!!

R, Dan Perkins

[C.B.]

When the day of reckoning arrives.. in Vietnam, what money they use to pay to escape by boat (Boat peoples) well, they ONLY Money accepted was GOLD of any kind.

Gold is MONEY.

When I saw some comments about using arms, it must came from no brain Americans.

[User 178335]

Anyone who says gold has no practical use has no understanding of it's physics or industry - though as much as a chief on a ficticious 4th-world island.

en.wikipedia.org/wiki/...

[mkreisel]

Gold will have its use until either the chaos or the tyranny begins.

[Toddler]

Fair points made above Chief but if you seriously think those 3 economists named above are so dumb, why don't you put your money where your mouth is.

Jim Sinclair (www.jsmineset.com/) is willing to offer you 1 million bucks for your smart advice so why not make some paper money so you can make enough money to buy you rice that will feed you a whole lifetime.

[User 97635]

I enjoy reading articles like this. It gives me faith that investment opportunities will always exist in many different areas because there are always stupid people like the author of this article who will remain poor and stupid because they dont do enough research before they invest or write. Thank God for human nature.

[paultaut]

another one...doesn't own gold in any form......must be short then.

[jt]

I guess anyone is allowed to write pieces for the public now, eh? Ignorance is bliss...better!!...it'... "wisdom"...!!!!! Well, I'd try to debate, but knowing this mindset and the arrogance behind it, well, I know it's a waste of time. Only history will change these people's minds, ie, having to live thru it. So PLEEEEZE...sell whatever gold and silver you have to your local coin store (if you have any of that "worthless" stuff) and buy buy buy your canned goods. We'll see what all you can barter it for if "it gets that bad" (to paraphrase).

On the other hand, to be a little gentler...most Americans are totally brainwashed, and those under 55-60 never really lived under a gold standard long enough to actually know the difference. They just need a large bucket of cold water and a hard slap in the face (to wake them out of their fiat-induced stupor...after all, most Americans now simply yawn at the thot of a $Trillion dollars being spent or lost or bet on derivatives) tied up in a chair that will play for them the history of the world, and more specifically of the fiat frauds of "modern" day history, and I'd include the Roman Empire there... in little snippets. In this instance, it's often not a case of "how soon they forget"...it's a case of they've not really been told the truth. They need to watch and learn from history...all fiat frauds have ended badly...or they will ALL have to live thru the same ole same ole. People don't change...just technologies. As Solomon said, "And I saw that there was nothing new under the sun"...history most assuredly repeats itself. jt

[et2cetera]

DP,

Your articles raise some interesting points but they seem only to describe things in a vacuum, very much like the anecdote about being on an island with one guy holding all the food. It also touches on distribution and control of resources but more on that later.

Gold, because of its scarcity and other attributes make it desired and valued, hence been deemed too valuable for common industrial use. It follows naturally that with common recognition among people and civilisations that it becomes a mean of transferring / exchanging value and store of value. Roman gold coins and the Bezant - a Byzantium gold coin - were still traded long after their empires were history. Gold is not, as naysayers have it, useless and so it is not used in industry.

As with most things, even money / medium of money follows a cycle. When a society first collapses, barter trade may be the immediate means of obtaining sustenance and daily needs as people seek direct fulfillment. In this period, gold may be too valuable or even pointless in trading for a loaf of bread. However, after the initial shock, some order would prevail and attract people to form small communities. In such a community or town, barter trade will be too cumbersome. Imagine if you were a rice farmer who wanted a new suit but the tailor whom you wish to trade with wouldn't need rice right away (after all - it rots after a while) but would like a new cabinet. Would you go around looking for a carpenter who needs corn, with your ears of corn in a cart? Logic and convenience would dictate that people have a medium of exchange and store of value. Through all the experiences of large civilisations, gold and silver have fulfilled this role admirably.

Your example of you holding all the food and none of the gold, apart from the problem of storage, is too extreme and would unlikely be true even in a great societal meltdown. Supposing that it did, here are some factors that would negate your example:
First, would it be possible to monopolise all the food? Even if you were truly on a small island, wouldn't you be able to find some subsistence farming or fishing?
Second, wouldn't you need other necessities like clothing or services like medical aid? Not all tailors/doctors may want your food right away (undoubtedly some would also have their own horde) and would you be their only source?
Third, even if petrol was exorbitantly expensive or unavailable, people may find a way (by foot, animals) to go elsewhere to settle or become farmers themselves? And if they do, what would be instantly recognisable and tradeable.
Fourth, between larger communities / towns, again what would be a recognisable means of medium of exchange and store of value?
Fifth, control of resources. While you may deem gold worthless, there are willing individuals who exchange firearms or their services as mercenaries for the little bright shiny things. With these you can control the remainder of your resources or take more. This has been the historical playbook for warlords/princes. One doesn't control resource or people with a single commodity alone (eg food).

Primarily, the problems we face are deflationary on one hand and inflationary on the other. While we await for either of the two to show which is dominant, it creates the present uncertainty. It seems like based on the historical experiences of societies, the US is more concerned about deflation (a la Great Depression) while Europe and the rest of the world are more concerned about inflation (Hyperinflation in Weimar Germany, 80s Argentina, present Zimbabwe).

As to the value of gold, one advantage that it has over all currencies, is that it will not go to zero as it has an intrinsic value based on the cost of extracting it and the value attributed by society. What is the true value of gold? Well, no one truly knows, do they? So, in a way you could be right that we are all speculating about the value of gold in dollar terms. However, compared to other commodities, it has been pretty consistent.

Well, you argued about gold's value in deflationary times that it will drop but comparing to other commodities which would be dropping then, wouldn't it have maintained its value? Hard assets like property in such a situation may be worse off. What are you going to sell your hard asset into? Dollars? In a closed economy, deflation may make the dollar more valuable or no worse off but in an open economy, dollars are devalued relative to imported goods. In an inflationary environment, everything goes up in price but gold would have maintained its relative value to commodities. The main sufferers would be those holding all their networth in dollars.

As to why gold coins are not circulating, Gresham's law applies. It is often known as "Bad money driving out good money". When money in the form of dollars and gold coin are of equal worth (USD20/oz in 1933), people use them interchangeably in full confidence of the unit value of their money. However, when more dollars are printed and its circulation volume increases exponentially beyond its supporting base of goods and services, the unit value decreases. People begin to hoard the gold coins because they see that the dollar is depreciating. Moreover, if they see no end to the depreciation, would they be willing to take our their gold to use? Worst, is there any assurance that once gold leaves their hands, it would return?

Today's price see gold at about USD930/oz. Would it go higher? With the Fed already shown its willingness to push the digital printing press - I think we know the answer.

After all, even if gold were to be treated as merely a store of value, even at USD35/oz in 1971 for 100 gold coins, those same 100 gold coins would be worth USD93,000 today. So, if you had to store your wealth for the next twenty years, would you have keep USD93,000 or 100 gold coins?


* Bottom line - Get physical gold & silver. How much is a matter of personal preference. Watch out for speculative manias which it would undoubtedly go through.

Oh yeah, and as for Asia, India makes up the largest retail consumer for gold at present. China has barely started and the people now are beginning to have the means to accumulate. Interesting times ahead.

[carbonates]

Nonsense. Stocks, bonds, and even Miami condominiums would be just as worthless as gold on your hypothetical island. Skill would be the only thing of value in that situation. On the other hand, gold as a store of value has done quite well and in a relatively less catastrophic situation would be more valuable and more liquid than stocks, bonds, Miami condos, or even the US dollar. I'll keep my gold, my guns, and my common sense.

[Sushil]

I am holding onto to my Gold. It makes me feel comfortable that there are still lots of people think purchasing gold is nonsense. By the time you made your mind to buy gold, I would be the first one to sell :)

[TERN]

Another hypothetical story:
A coup-d'etat in Saudi Arabia brings a junta to power that will replace the Saudi Rial with an Islamic gold Dinar. Saudi Arabia has its own gold mines to back this currency and to make double sure it now demands payment in gold for its oil exports.
China, which has just become the world's largest gold producer, creates a sepate fully convertible Yuan, backed by its gold reserves in the ground. In order to create liquidity and credibility for its gold standard, it purchases bullion on the open market with its depreciating dollar reserves.
Switzerland with its large remaining gold reserves joins the return to the gold standard...
Other large gold holders, such as the Netherlands, will be under pressure to follow.
Unlikely? Sure.
But the story of the worthless gold on the stone-age island is even more far-fetched.

[Dirty Harry]

Excellent observation but flawed conclusion. True, Gold has no practical application so it's value is completely reliant upon consensous as a currency for exchange.

Yes, food and water are the second best assets to posesse during chaotic times. However, the author will be in big trouble relying upon a hoarded case of tuna when things get REALLY NASTY. What kind of leverage is he going to have negotiating with someone holding a Glock to his head?

Let's take the authors example of the plane crash into the Chief's island. Suppose the "three amigos" had their Gold and instead of money you had a pump shotgun in your luggage. The negotiations would be short-lived. You'd quickly have persuaded the "Chief" to name you as his immediate successor, give you all the food and be enjoying his girlfriend for desert.

[keo]

Well dirty harry, that's a really good way to make friends with the locals... After your dessert, watch your back, and enjoy your stay on the island...Hope you sleep well.

[ValG]

Gold has had value for many-many ages, and not because of it's practical use. In my opinion, arguing about what it is in gold that makes it so valuable is pointless. Why? Gold has a CHARISMA, something that people cannot rationally explain. People went to wars for gold, killed other people, often nearly starved themselves to death... And what for? Only to be an owner of this yellow metall, percieved provider of divine power... A Man is irrational, look at the things simple

[SmackMacDougal]

Dan shows the World that he suffers from indoctrination induced by High Priests of the Church of Academia.

By his words, Dan says:

[1] gold ... from $250-$450 an ounce. Somewhere therein ... gold's perceived intrinsic value versus jewelry and industrial uses

[2] gold has very little intrinsic value!

Intrinsic Value relates to Gold Coins and not Gold. When money became coined, the names of the coins reflected the fineness of the ore (silver or gold) used within the metal of the coin.

Thus, a gold dollar coin would have been a gold coin containing its full denominational worth of precious gold ore by fineness within the metal (gold ore plus other ores).

Money is a commodity like rice or oil. Money value
rises and falls owing to call for and offer of money, same as any commodity.

There cannot be a fixed measure since all values are relative that result from ratio of one thing swapped for another.

The Law of Natural Displacement holds that lesser kind of money gets replaced by a greater kind of money owing to the natural features of money -- highest degree of steadiness and swap factor.

The Law of Artificial Displacement hold that legislative decrees force from use good money. Thus, money with the highest bullion value will disappear from circulation.

The purpose of money is to hold in time the concept of One Right swapped for Another Right.

When governments meddle with rights, picking winners and losers, skimming off the top for those holding power. Problems follow quickly.

For a commodity to become world money, the commodity must feature these aspects:

[1] durable
[2] almost indestructible
[3] divisible into convenient-sized pieces
[4] run back into bars without loss of material
[5] worth as much when run into bars as when in coin

Right now, folks worldwide see the U.S. government and the Fed Reserve Bankster system as invasive regarding Rights between folks. They'd rather hold gold than US Dollars since they see, rightly, that

[1] debasement arises from the legal tender quality of money only (value by fiat)

[2] paper money becomes as deficient as the property (right) upon which it gets drawn

Far from shore, a lost boat fought waves in a storm. The captain began tossing cargoes overboard. Each dumped load helped to righten the ship. Eventually, the captain steered the lightened ship into a new haven.

If folks could shed their many false beliefs about money and come to see money for what it is, they would begin to live better.