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Gold vs. Currency: Discussion:
Ohan Karagozian wrote:
I was browsing through your page and came across something of interest - Gold vs. Currency. You are right that Gold is not currency, per se, but that it is a commodity and, as such, it does really have value.
The paper currency we use today, you say, is a medium of exchange and can be treated as a contract between the person possessing that currency and the issuer. Can you clarify?
Specifically, if I work 1 hour in 1982 and make $10.00 then, in 1982, I could buy 10 gallons of 87 octane gasoline with my money. So far so good. The $10.00 I made in 1982 is now worth less. Today I can only buy 1/2 as much. What happened with the contract? Of what worth is my money if the purchasing power of my currency is devaluing on an ongoing basis?
The reason gold is a hedge, is because it provides the owner with a sense of security. There is no guarantee of security only a sense because no one can fortell the future. The number of hours a person worked in 1982, or any other year, generated an income. With that income, if a person placed his or her savings in gold, the relative currency value of their hard work is very close to what the currency value of gold presently. However, if all the person did was hold on to currency, then the value would be about halved even with nominal bank interest. The idea of placing savings in the stock market is, in many people's opinion, nothing less than a blind crap-shoot in a back alley game hosted by drug dealers where even if you win you may still get stabbed.
In my humble opinion, currency is medium people use to trade only!!!!!!!!! Currency is not a vehicle for savings. People invest in homes and other tangible assets believing that their investment will appreciate or, at the bare minimum, retain value equal to or greater than the currency they used to purchase that asset. As such, gold is an investment but not a currency. The attraction to gold is its portability, compared to currency or other assets, and it's relative value in modern society. For thousands of years it has been accepted as an item of value and it is unlikely to diminish appreciably anytime soon.
Your contention that a person can not spend their $600 suit is correct, but not so with gold. A $600 suit looses it's value once it leaves the store and has only value to the original buyer, but not so with gold. Aside from the many coin traders found throughout the whole world, regular citizens, businesses, commercial industries and even governments also value gold. The value they all place on gold determines its value. Is it possible that everyone will turn their back on gold - yes, it is possible, but it is unlikely - at least not anytime soon.
I am not proposing that people should put all of their savings in gold, but I do propose that people put their savings in tangible assets - a house, silver, copper, gold, diamonds, platinum - anything tangible and preferably fungible. The most fungible being diamonds and the least fungible being a house.
Remember the old rule - "You can not take something from someone if you don't know they have it." Usually, government is in the business of taking and then spending. If government knows you've got something they can take it - not that they will, but they can. Currency is readily identifiable and has a serial number. Currency carries "political baggage" as do gold coins (remember the Krugerrand and the apartheid fiasco of the '80's?) How comfortable would you feel spending US currency abroad? If you are not despised for being a world bully, then you are targeted as a possible victim of crime. I understand that kidnapping is popular in the Central and South Americas these days - as an American, you are a walking target.
As for your commentary on Social Security, please update your colloquy to reflect the predisposition of President Bush's inclination to "tinker" and Congress' predisposition to "oblige."
Good luck in Belize,
Ohan
And I responded...
Thank you for your thoughts on my little note. It's nice to know someone somewhere is reading it!!
I didn't mean to imply that Gold doesn't have value -- of course it does, it has intrinsic value, in that we can use it to plate contacts and do other industrial things, and it has extrinsic value, in that people think it's worth something (they will pay four hundred or so dollars for it) to accumulate in lieu of anything
else
Life, of course, is a crap shoot, and there have been a number of interesting science-fiction and adventure stories that show just how worthless gold, dollars, or whatever would be if you were a) stranded on Mars or the moon or b) stuck on a desert island. Situations change everything.
Fortunately, it is better to invest your money speculatively than it is to put it in the bank and watch it grow slowly based on compound interest. As you point out, the current compound interest won't keep up with inflation. I say "fortunately" because we are better off with our money in places where it benefits the maximum number of citizens. Lots of stocks do quite well without being a crap shoot. A friend of mine who used to live in the Chesapeake Bay area invested some of his money in Baltimore Power and Light -- or whatever it was called -- about 20 years ago. It has been bought by someone else, but the stock has done quite well over the years. If you invest right now in health care stocks, I can guarantee you that you will make money -- not lots of money -- but more than enuf to counteract the effects of inflation and the diminishing dollar.
I simply mentioned the suit, because, when I worked for IBM, that was a common gem of info -- that an oz. of Gold _should_ cost about as much as a good suit. The idea came from England -- and Savoy Row suits, I'm sure -- but it has been a useful measure to me over the years. I certainly think it's a good hedge, but maybe not as good an investment as some other things.
In terms of investing in "things" rather than businesses, I think that land is always a good investment. A common statement in economics is "All of the great fortunes were based in land." This is so true that the exception proves the rule. California is an interesting place to study economics (which I did for three years or so) because so many movie stars in the 20's took their money and put it into land. Of course they all became millionaires.
Houses are something else. Houses usually depend on a buyer for their value, and the buyers perception. The Gen X people have a different perception of life, lifetime values, and investments -- particularly in a large house full of expensive things like their parents had. They will not buy the $500,000 houses their parents have, and will be trying to sell. This is a particular bubble which will break in the next few years. Beware, I say, but of course, you wouldn't do that. Probably you are not a boomer, and you think the boomers are just as crazy as I do. (I'm not a boomer, too old!!)
Thanks again for your comments. With your permission, I will post your letter to my website, along with this response.
Best regards,
Senor Reek
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