The misunderstanding of gold and the perpetuation of gold fallacies by academics, economists, and PhDs is easily explainable. Gold is the kryptonite to their errant economic theory. Gold signals the continuous error of the floating fiat PhD standard. Economists have to dismiss gold and the gold standard to maintain any semblance of relevance for the disastrous global fiat system. The unarguable, real-world result of the fiat system is that the dollar has lost 97 percent of its value since Nixon ended the dollar’s link to gold in 1971. This has resulted in harmful economic consequences that are inexcusable, regardless of whatever new theory economists invent to explain it away.
Academics, economists, and PhDs exist in the theoretical world where it all works on paper. We live in the real world where theories put in practice have real consequences. Inflation, deflation, monetary chaos, declining standards of living, and social instability are directly related to currency of no defined value. It is nothing new. Governments have manipulated currency for perceived economic gain since its first recorded introduction into society. The result is always the same. Currency of no defined value eventually gets manipulated out of existence.
We can sadly understand the academic ignorance of gold. It bestows upon economists power and relevance for justifying policy that metastasizes institutional control—which is any government’s natural proclivity. But what explains the wide range of gold fallacies perpetuated by the gold community itself? One would think a proper understanding of gold is in its best economic interests.
Gold has unique properties that set it apart from every other commodity. Gold cannot be compared with other commodities. This is the starting point for understanding gold. When gold is compared with other commodities, the error begins.
Gold is not consumed. Every other commodity is consumed either through agricultural food supply or industrial use. All other commodities are produced for the purpose of varying levels of consumption. Gold is the exception. Gold’s sole purpose is as a monetary proxy. Gold’s limited industrial use—which is also recyclable—does not negate this purpose. Jewelry is not an industrial use of gold. Jewelry is an alternative method of holding gold. Whether gold is held as a coin, bullion, or jewelry, its value is the same. The value of gold jewelry is its weight of gold. Numismatic coins may increase value beyond the weight of gold, but that is a limited exception. All the gold ever produced, less that which is lost, is still available. It is therefore axiomatic that gold is not consumed. The golden cargo of the recently discovered Spanish galleon San Jose maintains its productive value despite its three-century storage at the bottom of the sea.
There is no traditional supply and demand component to gold. This is where gold analysts often go wrong in attempting to predict the future price of gold. Gold is the only commodity that negates traditional supply and demand. It is the only commodity that does not backwardize. Its future price is equal to the spot price plus the rate of interest over that time period. Gold negates the traditional supply and demand component of commodities because its stock (all the gold ever produced) to flow (annual production) is so great. Gold’s value, like the level of a body of water, is the same everywhere. You can’t change the depth of water in a certain area of a pool by filling a bucket at one spot and moving it to another. Similarly, the value of gold does not change when it is sold and moved from one location to another. Demand for gold by Russia, China, India, or central banks will not result in an increase in annual supply. All it accomplishes is to move gold from one location, the seller, to another, the buyer. Gold’s annual production has remained consistent for centuries at around 1 1/2 to 2 percent of the total stock. Demand for gold does not affect this historical relationship.
Gold is also unique in that there is no “capital” component in the dollar/gold price. When capital is added to the production of any other good or service it changes its value. Gold is the exception. Adding capital to gold production does not materially change its production level. Gold production only rises or falls to accommodate changes in global technological and population advances. Lack of a capital component also explains why gold production has remained consistent for centuries.
The value of a currency in which gold is denominated determines its price. When gold’s value changes we do not witness inflation or deflation across all countries and currencies. There is only a change in gold’s value in the country whose currency is changing in value. Today we see this happening in Turkey and Venezuela. In the U.S. the value of the dollar determines the price of gold. Therefore the Fed, the U.S. dollar currency manager, determines the price of gold, not supply and demand. If supply and demand determined the price of gold we would see equal inflations and deflations across all currencies. Certainly, when the Fed devalues the dollar, demand for gold increases as a hedge against dollar devaluation. Increased gold demand is an effect of the change in the price of gold due to dollar devaluation, not a cause for the increase in gold’s price.
There is no direct relationship between the dollar value of the monetary base and the amount of gold available, despite the advocation of this belief by certain schools of monetary theory. Gold is often pitched for sale based upon this relationship. The pitch is that gold’s true value is much higher due to the value of the monetary base. That if there are X amount of dollars and Y amount of gold, the true price of gold is X ÷ Y. Using this relationship you often see pitches that the true price of gold is $10,000, $15,000, or $20,000. Any day now gold is going to explode to its true value so buy gold now. It is possible for gold to explode higher in price due to hyperinflation, but this would be due to Fed policy error in maintaining the supply of the monetary base relative to its demand. It is not possible to determine the dollar value of gold relative to the monetary base without examining dollar demand.
Gold is the Numeraire, the commodity par excellence, the unit of account, the standard of reference for the value of all goods and services. This is the basis for understanding gold.
The only true way to understand the dollar price of gold is to understand the value of the dollar. This requires understanding how the Fed works, fiscal policy, and the geopolitical world. A realistic understanding of these concepts removes the mystery that befuddles gold watchers.