The Properties of Gold

Understanding Gold 3

As Warren pithily observed, gold does get dug out of the ground.  Not just in Africa.  Gold is found on every continent on earth.  This is one of gold’s many monetary properties.  If one is looking for a monetary proxy, universal accessibility and availability is a good start.  All of gold’s many properties are monetary with the exception of limited industrial use.  Understanding the properties of gold is essential to understanding gold’s role as the monetary Polaris.  In fact, to start from scratch and create an artificial monetary proxy, would require that the properties of gold be mimicked.  In essence this is what bitcoin has done.  Bitcoin is a digital currency mined on the Internet from designed algorithms that nullify advances in computer technology.  Bitcoin’s algorithmically designed rarity simulates the preciousness of gold.  Despite being found everywhere, gold is rare.  Its preciousness is nature’s designed algorithm to nullify technological advances to mining gold.  This is why gold’s value has remained stable over millennia.

Gold did not become the monetary Polaris by edict of Kings, Monarchs, or unelected governmental policy boards.  Indeed, just the opposite.  Gold achieved its role solely through democratic means.  The history of mankind selected gold as the monetary proxy..  As economies evolved from self-sufficiency, to barter, to the marketplace, commerce required a means of exchange, store of value, and unit of account for efficiency and advancement of economic progress.  This was a trial-and-error process over thousands of years that continues today.  Mankind still struggles to understand the monetary universe.  The history of money records all matter of attempts to divine useful money.  Cowrie shells, salt, cattle, livestock, stones, cocoa, cigarettes, pelts, trinkets, whale teeth, commodities of every variety, metals, silver, and gold were all used as money. Like any process over time, trial-and-error eventually discarded the least useful in favor of the most efficient and monetary.  The world gravitated toward gold and by the mid 1800s all developed nations adopted gold standards.  Each nation defined its currency in terms of a specific weight of gold and adjusted the supply of money to meet demand at the fixed price.  The Constitution founded the U.S. on a bimetallic standard based on gold and silver.  The Gold Standard Act of 1900 ended silver’s defined monetary role, and put the U.S. on a monometallic standard based on gold.  Gold’s monetary stability established the foundation for Great Britain’s empire, followed by the American empire.  Today, for the first time in societal history, the world has severed all monetary links to gold and relies on fiat currency linked only to forced, tenuous trust in government and their monetary agents. 

To measure the value of the galaxy of goods and services requires an unchanging vantage point.  The chosen monetary Polaris has to remain constant or its unit of measurement becomes part of, and lost in the values it is attempting to define.  This is no different than if any standard of measurement was constantly changing in value against what it is attempting to measure—for example, a geographic location defined off a moving star or a building constructed while the length of a yardstick changes daily. Without a defined unit of measurement for distance or time, reference is lost, precision is sacrificed, and haphazardness reigns.

The economic world is no different.  It requires a definable monetary unit of measurement for reference.  Today, we are lost in our chaotic economic world with no standard of monetary reference.  Economists and board members of the Federal Reserve are unable to define or even understand the simple concept of inflation.  This is as basic to economics as a compass is to navigation. If the Federal Reserve cannot grasp even the simplest of economic concepts, how can it be trusted to competently manage the world’s reserve currency?

Gold eliminates the Federal Reserve’s Economics 101 confusion by providing a fixed reference point upon which to manage currency without inflation or deflation. To understand gold requires understanding its many unique monetary properties.

Gold’s refractory chemistry of 79 protons is central to its uniqueness.  Gold cannot be chemically altered or created from other elements.  Alchemists have attempted to create gold from base metals, without success.  Sir Isaac Newton dabbled in alchemy.  Along with famed British Chemist Robert Boyle, their attempts to turn base metals to gold led to modern chemistry, but never to the elusive recipe for the Philosopher’s Stone.  While it is possible to change the atomic make-up of other elements to gold in a particle accelerator, the amounts are so infinitesimally small that a particle accelerator would have to operate around-the-clock for 50 million years just to produce one gram of gold.

Chemical change, rust, or weathering will not alter gold.  It is non-corrosive.  Gold does not oxidize and it is immune to the elements.  Gold bullion held in storage today or the gold coin in your safe deposit box may contain gold from 15th century Inca and Aztec artifacts stolen by Spanish explorers, shipped to Spain, and traded into the world market.  Gold gets melted and reformed into monetary units or jewelry and passed forward over millennia.  Sunken ships from centuries ago are still being salvaged today.  Their golden cargo, when discovered, remains as pristine and valuable as the day it set sail.

Gold is a highly malleable element.  It is soft and easily divisible.  This lends to gold’s accessibility as a monetary unit since gold coins are easily minted.  Strike a diamond with a hammer and the result is useless dust.  Strike gold with a hammer and there is no change in value from its altered form.  Gold is dense.  It uses little space in relation to its weight.  Its value in proportion to its size is very high.  Gold can be hammered into thin sheets.  A piece of gold weighing slightly less than an ounce can form a sheet that will be only be one ten-thousandth of an inch thick and will cover more than 68 square feet.

Gold is a precious metal.  Its availability is rare.  Yet, gold is found on every continent on earth.  Trace amounts of gold exist in seawater.  Gold’s preciousness increases with advances in population and technology.  Large, easy gold finds today are elusive.  Gold’s increasing preciousness keeps worldwide production constant at around 2 ½ percent.  Annual gold production has averaged this near constant value for centuries.  Gold’s preciousness prevents manipulation by government entities desiring manufactured outcomes.  Governments cannot distort the value of gold for the achievement of policy goals.  Gold is honest because its value remains stable. 

Gold is not consumed like other commodities.  Roughly 85 percent of all the gold mined throughout history is still available.  Users of other commodities such as copper, steel, agricultural products, and oil consume them within one year of their production.  Wheat, corn, soybeans, etc. that are not consumed in a timely fashion will rot and become useless.  Supply for all other commodities becomes synonymous with demand.  Gold is the sole exception.  Gold is the only commodity whose spot price is the same as its future price.  This means that gold’s price in the futures market is equal to its spot price plus the rate of interest over that time period.  For this reason gold is the only commodity that is in contango, or never backwardizes.  

Gold has the least industrial uses of all metals.  Manufacturers use around 10% of gold’s annual production for industrial purposes.  The primary industrial use of gold is in consumer electronics.  Gold is conductive.  Manufacturers use tiny amounts of gold in most consumer electronic boards .  Cheaper substitutes will displace gold’s electronic use with advances in technology.  Even still, there is a vibrant industry to recycle gold from electronic devices.  Gold’s malleable, dense, non-corrosive properties make it also useful in dentistry, which is also ultimately recyclable, and in spacecraft safety equipment.

The main uses of gold are monetary substitutes and jewelry.  But jewelry is really nothing more than a monetary substitute.  The amount of gold that exists in most gold jewelry determines its value.  Thai baht jewelry is 96.5% pure gold defined by a weight unit commonly called a baht.  A baht is 15.16 grams or approximately ½ troy ounce.  Selling or owning baht jewelry is exactly like selling or owning money.  Whether it remains jewelry or gets melted into another gold form, the value is the same. 

These are the properties that make gold unique and differentiate gold from all other commodities.  In short, gold is a monetary proxy.  It has no other defining purpose.  Without understanding gold’s properties and utility as a monetary reference, dismissing gold as a useless barbaric relic becomes intellectually de rigueur.  This is the current state of economic theory and conventional wisdom throughout the academic world.

There is a reason that conventional economic wisdom dismisses gold.  Gold’s utility as a monetary reference is democratic.  Government policy, legislation, decree, or financial speculation cannot manipulate the value of gold.  Gold’s fixed reference point provides a measuring stick for the value of all goods and services.  When monetary authorities use gold as a monetary reference point, governments lose their ability to manipulate currency for perceived policy goals, which always end in devaluation.  Without gold’s fixed reference point of value, the value of currency becomes subject to the whims of secretive, unelected, unaccountable policy board members, whose interests may not be aligned with the citizens they represent.  This is the opposite of democracy; this is rule by monopoly elitism.  Gold’s unique properties align it with democracy and the masses, while fiat currency’s creation by whim align it with forced rule and elites.  For this reason, the world will always work itself back to gold and monetary stability after each successive attempt to abandon gold—based on the latest enlightened, progressive academic theory—ends in the next round of economic impoverishment and social disorder. 

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