rationalist

Gold: The Only Remaining Bubble?

Is gold a _hard currency_?
I dont think so.

Is it a commodity?
I dont think it is a commodity like all other commodities either (even silver).

Gold can have two uses - either as currency (which it currently does not anywhere in the world) or as commddity - mostly in form of jewelery.

The value of gold depends crucially on the first use of it. If gold was becoming currency, it's value will shoot up to the moon, because there is so much less gold than the paper money flowing around the world. If gold merly stays as a fancy, odl-fashioned welath and inflation protection tool, then it's value will go up for some time to come, but then it will crash down again. This would not be bad in itself, but of course the timing would be impossible to guess - just like with all other speculations.

Now - the question is "will gold become a currency"? Will it take on its traditional role of money?

I dont know the answer, but I think that it has a much greater chance of doing so than ever since the 1971, when it's last use as money was abandoned by Nixon. Whyere is this chance coming from? Well - countries are realizing that keeping their hard-earned reserves in paper is perhaps not the best idea. Russia announced recently it will start buying gold; China said some time ago it will start diversyfying reserves. This will mean also gold purchases.

Even more importantly - people start realizing that government has too much freedom with the printing press and that in the past it has abused it. People like investors are also realizing that gold while it may be old-fashioned is a much surer thing than any paper - be it in form of treasuries or notes. It is absolutely sure that if the market was allowed to decide what they want as a currency, they would chose gold. Gold was the money of choice for the market suring thousands of years of modern economy - it would be the money of choice now as too, had the government not interfered. There is even infrastructure being built for this purpose - go to e.g. goldmoney.com.

Of course governments will never do such legislation but I dont think such legislation is necessary. What is necessary is the freedom of market participants to choose what they want to use as money. I don't think the critical mass has developed yet to start getting back to gold-based money, but as the crisis develops and people suffer from unpredictable currency exchange rates and from dilution of savings by the printed money, this idea will gain traction and later on the pressure to have this possibility will grow.

One last word about inflatin vs deflation - we may not perceive price decreases now, even huge amounts of money are printed. But people who have saved, especially those who have saved in assets thwt would not disappear had the banks gone bust, have witnessed already a huge dilution of their savings. In a situation of uncertaing brought by recession the demand for liquitidy is huge. People want to get back to the most liquid asset until the dust settles and they are able to discover the real value. With the pumping of money by the Fed, the dust does not settle, the real value is not discovered and noone knows what will happen in the future. This increases uncertainty and the huge, unnormal demand for liquidity remains. This keeps the prices down despite the monetary inflation. Of course - I also agree that debt deflation is happening. The availability of loans has plummeted, because the banking system is broke and they dont want any more risk. But monetary inflation is going on, just that it doesnt show up because the demand is outpacing it. As soon as the dust settles the demand for liquidity will change into demand for returns. This will release all the inflation that is happening now into the price increases. This will be the time when gold will rais big time.