Understanding Gold 6
Gold’s many properties define it as a monetary proxy. Gold has no real use other than its role as a monetary commodity. Mankind selected it for this role because history has proven the stability of its value. Gold’s preciousness, universal availability and randomness, density, divisibility, and immunity to erosion define its properties. One may consider that its monetary singularity of purpose defined by its geographical preciousness is simply too perfect not to be divinely inspired and created. Mankind needs a stable monetary reference and gold has provided it.
Gold proved its efficacy as a stable monetary reference throughout history. From 1694, starting with Great Britain, until 1973, most of the developed world were on some form of a gold standard. When these countries linked their currencies with gold, they recorded no inflation or deflation. Stable money linked to gold combined with low taxes always results in sustained economic growth. The repetitive cycle between stable money, low taxes and growth, and fiat money, high taxes, and economic decline defines the history of economics and progress.
What sets gold apart from all other commodities is its lack of a capital component. Advances in capital and population growth influence the supply and demand for all other commodities, industries, technology, and manufacturing processes. The yield from agriculture increases in lock step with advances in capital and population growth. Ditto for every other industry and manufacturing process. The technology revolution enabled rapid productivity advances across every economic sector of society. The productive ability to do more with less based on human ingenuity is the story of humanity’s continuous advancement.
Gold production is the exception. Advances in technology and population growth only serve to keep gold’s production stable at around 2 percent per year. Gold’s annual production has remained stable at this value for centuries. In the 1800s a lonely miner with a pick defined gold mining and its production. Massive automated tunnel borers, automated rail systems, 3D mapping, ore processing advances, and constant technological innovation define gold production today. Yet, miners still find gold at the same rate today as they discovered it hundreds or even a thousand years ago. The preciousness of gold has negated advances in capital. The absence of a capital component in defining the price of gold is what has kept gold’s value stable for centuries. Without a capital component, the labor required to extract it from earth determines its price. In this sense, the labor required for a miner with a pick in the 1800s to find an ounce of gold and define its value remains the same today. This value has remained constant over millennia.
We don’t have to just accept an abstract theory on a blind leap of faith. We can judge gold’s stability of value based on history. Firstly, the stock of gold rises every year, never falls, and gold’s production has remained constant around 2 percent annually for centuries. The production of all other commodities expands and declines to meet supply and demand.
Secondly, gold is the only commodity that does not “backwardate” or “backwardize”. Gold’s future price is always equal to its spot price plus the rate of interest over that time period. There is a word for this, “contango”. If a commodity’s future price was less than its spot price, it would be in backwardization. The spot and future prices of all other commodities diverge and converge because of the influence of business cycles and the environment. Their production corresponds with the vagaries of supply and demand. But not gold. Gold having no capital component is the only explanation for why gold does not backwardize.
George Gilder in his excellent new book on money, The Scandal of Money, expands Claude Shannon and Alan Turing’s information theory to money. Information theory tells us that information is not order, but disorder. Surprises from human creativity emanate not from predictable regularity but from the unexpected modulation, the surprising bits. Necessary to transmit the unpredictable surprises is a predictable, low-entropy carrier immune from change, devoid of surprise, and defined by the irreversibility of time. In information theory, the low-entropy, predictable carrier has evolved to the electromagnetic spectrum, determined by the speed of light in vacuum—an unwavering constant.
The information theory of money operates on the same principle. Falsifiable entrepreneurial experiments of free enterprises are the source of surprising knowledge. Gilder defines wealth as knowledge and growth as learning. The high-entropy disorder surprises that lead to wealth and growth require a stable, low-entropy carrier for transmission. Gold is the carrier, a monetary measurement standard also governed by the irreversibility of time. Gold’s stability of value based on its unique properties and lack of a capital component insulate gold from being affected by the values it gauges. Unlike fiat money, gold does not become part of what it is measuring. Gilder writes that money must “establish a regime of irreversibility—the assurance that transactions or contracts cannot be reversed, counterfeited, or nullified by private actors’ double-dealing or by public entities’ inflating the currency or countermanding contracts.”
By expanding information theory to money, Gilder provides the intellectual foundation to return gold to its essential role as an unwavering monetary reference in our modern, quantum world. Gold never left this role; academia left its understanding of gold. Our 45 year experiment with fiat money is reaching the end limit of money illusion and it deleterious effects. The evidence is everywhere. The decline of the middle class and its standard of living, unsustainable debt, manipulated interest rates, high unemployment, capital misallocation, economic stagnation, and a return to malaise. The purveyors of fiat money now rue the end of growth. They tell us that in our age of unimaginable technological progress, human ingenuity and economic growth has suddenly hit a permanent dead-end. Nothing could be more ridiculous.
The earth regulates the availability of gold. There is wobble with gold, just like there is wobble with the North Star from shifts in the magnetic North Pole. Over tens of thousands of years, the current North Star will lose its role as a fixed reference point for celestial navigation and astronomy. Another star of more fixed reference will replace it. The earth also physically limits the availability of gold. We can assume at some point in the distant future beyond our lifetime that mining gold at its historic 2 percent annual rate will no longer be possible. Technology will provide a solution. Crypto currencies that mimic gold’s properties are in the infant stage of gaining acceptance. Based on a public blockchain that prevents government manipulation and honors the irreversibility of time, a crypto-currency that replicates gold’s properties has potential to replace gold as a monetary reference.
While we can compare a crypto-currency to gold, there is nothing with which to compare gold’s value. Gold remains the monetary Polaris. Today, a return to a gold standard is essential for a return to real economic growth. History has proven that the abandonment of gold as a monetary unit of account always leads to economic stagnation, regression, or collapse.