Prices When Gold Is Money

We are getting ahead of ourselves here. Gold does not circulate as money – yet. It might never do so. Perhaps the end of government currency, fiat money imposed on us by government laws, may never be replaced by what for millennia has been the people’s money, gold. Do we even wish it? Given what we have to do to get there, probably not.

It is hard to think of a life without Nanny State giving us her money-tokens to buy our sweets, telling us what to eat and what medicine to take. But Nanny State is getting long in the tooth. When she was younger, she was less controlling. Her constant refusal to allow us, the ordinary people, to do what we want is an increasing source of friction.

Growing numbers of us can see Nanny State should pack her bags. But Nanny State’s favourites are frightened at the prospect of no nanny. Those of us who want a life without Nanny State can’t agree what it should be, and don’t know what happens when she goes.

Above all, there’s a feeling our secure, controlled world is coming to an end. Increasing financial instability and economic uncertainty are our common destination. Nanny State has frittered away all our pocket money, and it turns out the cupboard is now bare.

We can see the state is irretrievably bust. But governments don’t go bust, economists tell us, because they just issue more money to pay the bills. This is wrong: it is going bust by other means, and those of us who don’t see it are driven by wishful thinking. Ultimately, government-issued money will reflect its issuer’s complete bankruptcy. And there’s no point in following up the collapse of one fiat currency with another. The Zimbabwe dollar is followed by the bond note, and Venezuela’s bolivar is being followed by the bolivar soberano. Bust is bust is bust. It is the logical outcome for all national currencies issued by spendthrift governments.

In the entire scope of human history, government money is always ephemeral. It dances above the water for a relative day or two before it is spent and dies. One day in the future, we will turn back to gold, as we always have in the past. Governments, as demonstrated by the Mnangagwa and Maduro regimes, will resist it to the bitter end. Like children robbed of all their pocket-money, the ordinary citizen will be left with nothing. The only exchangeable value will be gold, and probably silver as well.

Those who have gold will escape the poverty of those that don’t. In time it will begin to circulate as the gold haves buy things from the have-nots, and gradually with the wider distribution of gold a sense of normality will return. It matters not if we price things in gold-grammes, or whether a slimmed-down government gives it a name. Sovereigns, eagles, krugerrands. It matters not if we use them electronically, so long as the bullion is readily there, and all credit is repaid in physical gold.

This article explains how prices work in a world that trades using gold as money. It assumes all forms of cash and electronic money is gold in another guise. We assume there is no issuer risk, because there is no fiat money. To explain pricing in gold we must contrive an ideal. It is this ideal we will assume.

The basic role of money

Money’s basic function is to facilitate the exchange of goods and services, its role always being temporary. Both parties in a transaction must have faith that the money is readily accepted by everyone with whom they transact, and that means all those counterparties must have faith that their counterparties will accept it as well. This has always been gold’s strength. It is a considerable disadvantage of fiat money, whose acceptance is confined by national boundaries.

We exchange goods and services because it is infinitely more efficient to buy from others what we cannot provide for ourselves, or that to do so would waste our time unnecessarily. Instead, we specialise in our own production, selling it for money so we can buy all those other things. It means we must keep a small store of money, or at least a facility to access it, in order to satisfy our daily needs and wants. And who sets that amount? Well, we do as transacting individuals.

When we have a temporary surplus of money, such as from the sale of an asset, we reinvest it. Either we buy another asset, or we lend it to someone else (usually through an intermediary) for interest. It matters not whether it is fiat money or gold.

The general level of prices is set by the purchasing power of the money in which it is measured. The two most important variables are the quantity of money in circulation, and the relative average preferences that people have for holding money relative to goods. Of the two, changes in relative preferences have the greatest immediate impact on prices.

If people decide as a whole to reduce their preference for money, then the general level of prices will rise. Indeed, hyperinflation, described as a catastrophic rise in prices, is the visible symptom of a widespread flight out of money. In other words, preferences are to not hold any money at all and to get rid of it as quickly as possible.

Alternatively, if there is an increased preference for holding money, prices will fall. This additional preference for money can be expressed in two ways. It can be held as physical cash, or more commonly people increase their savings. An increase in savings generates a shift in production methods to compensate for the lower prices of consumer goods. The greater supply of capital for investment tends to reduce interest rates and alter the businessman’s calculations in connection with his production.

These are the considerations behind the deployment of money in a community, whether it is fiat money or gold. It is the way economic actors make best use of the money available, and in free markets, which have proved to be the most consistently progressive of systems, production does not need the stimulus of additional money to that already in circulation. That is a neo-Keynesian myth.

Trading with gold as money

People in a community, town, city or even a nation set their own monetary requirements. Let us assume that in doing so, the general price level, that is to say the balance of preferences for or against gold relative to goods, differs from that of a neighbouring population. In that case, an arbitrage will take place, whereby gold will flow to the community with the lower prices to pay for current consumption, so that the purchasing power of the gold in the two communities will tend to equate.

Additionally, gold savings will seek out the higher returns between the two centres and flow the other way from gold seeking lower prices. However, the quantities of gold held as savings are always significantly less than the quantities spent in consumption. In fact, the arbitrage takes place both through the trade of goods and also by the deployment of capital exploiting interest rates differentials, so that a balance in prices and interest rates is achieved.

It is therefore easy to see that in a commercial world with effective transport and communications, whatever the local preferences are for holding money relative to goods, multi-centre arbitrage tends to produce a common price level and a common level for interest rates. These adjustment factors are conducive to trade, not only between communities but between nations. And trade priced and settled in gold is, all else being equal, far more effective than when individual fiat currencies are involved, because with gold as the common money national boundaries are not a barrier and trade is truly global.

Given gold’s ubiquity as money, the effect of localised changes in general preferences for holding gold relative to goods can be regarded as minimal. An additional consideration is an underlying inflation of above-ground stocks of gold through mine supply, but this is broadly offset by population growth.

Technological innovation and improvement in production methods as well as competition all tend in the long run to reduce the general price level of goods and services. So, while there is little change in the general level of prices from the money side, there can be a significant reduction in prices over long periods of time from the goods side. The effect is to enhance the purchasing power of savings, leading to stable, low interest rates and the accumulation of private wealth.

- Source, James Turk's Goldmoney

The Psychology of Systemic Consensus

We are all too familiar with established views rejecting change. It has nothing to do with the facts. Officialdom’s mind is often firmly closed to all reason on the big issues. To appreciate why we must understand the crowd psychology behind the systemic consensus. It is the distant engine that drives the generator that provides the electricity that drives us into repetitive disasters despite prior evidence they are avoidable, and even fuels the madness of political correctness.

Forget the argument, look at the psychology

A human prejudice which is little examined is why establishments frequently stick to conviction while denying reasonable debate. Anyone who addresses the unreason of the establishment risks their motives being personally vilified and attacked. There are many fields of government where this is demonstrably true.

Leadership is too often based on prevailing beliefs, with minds firmly closed to any evidence they might be wrong. Even Galileo was forced by the Inquisition in 1633 to recant his scientific evidence that the earth revolved around the sun – a thoroughly reasonable and logical though novel proposition to the independent mind. But it wasn’t until 1992 that the religious establishment at the Vatican forgave him for being right.

That was 359 years later and long after it mattered to Galileo. Fortunately, when the establishment view departs from the facts it rarely survives as long. Socialism, economics, climate change and Brexit show the same static opinions insulated from inconvenient contradictions. This is not to say the establishment need be judgemental. Democratic government at its best tries to remain neutral and reflect a balance of opinion. But there are times when it loses sight of firm ground and becomes subverted by the psychology of its own established but unfounded beliefs.

The debate over Brexit is a classic illustration of psychology over reason, where few Remainers or Brexiteers have changed their views since the referendum in 2016. Influential Remainers are, by and large, those who have worked in government during the forty-five years of Britain’s increasing transfer of political power to Brussels. There are others who vehemently believe that being part of a larger economic unit is more secure than exposure to free markets. There are also those who believe Brexit will directly affect their lives and fear the uncertainty. Whatever their reasoning, their subconscious instinct is to seek protection in a guardian establishment rather than risk a commercially-based proposition.

The purpose of this article is not to debate Brexit, or any other government policy, but to explain the psychology of systemic consensus. Brexit is only an example of a wider phenomenon and serves as a topical example. This article expands the scope of the work of Pierre Desrochers and Joanna Szurmak, both of Toronto University, who examined the longstanding link between theories of overpopulation and climate change.[i] I argue that their thesis is also applicable to other instances of human debate, where psychological factors inhibit reason. Brexit will be our case study, being topical, but I shall refer to other examples as appropriate.

Brexit’s propositions

There are two main propositions upon which Brexiteers base their argument. The first is the loss of British sovereignty, by which they mean the right of the British electorate to determine its collective future. Traditionally, this has been the preserve of Britain’s parliamentary democracy, with an elected Parliament enacting all legislation which is then administered by the courts through criminal and civil law. These established democratic rights have been increasingly abrogated to an unelected executive in Brussels. True, there is a European Parliament to which the British electorate sends representatives, but it cannot initiate legislation, nor can it to all practical extent exercise control over the executive. The remote Brussels executive is also superior to national parliaments and imposes regulations which have to be adopted in national laws. The European Court of Justice is the supreme court, overruling national legal systems.

Being in the EU means the loss of democratic accountability for the British electorate. The Brexiteers say it is a simple matter of fact. Being out of the EU and reverting to full parliamentary accountability would be a return to long-standing democracy, which nearly everyone agrees is the best form of government.

The second major issue is arguably the lesser of the two, and that is whether Britain’s economic prospects are better in the European Union customs area, or independent from it. The empirical evidence is Britain did spectacularly well in the nineteenth century by removing all trade barriers and tariffs and having no trade agreements, owing its pre-WW1 global status almost entirely to unrestricted trade. The Brexiteers claim the economics supports the empirical, with EU trade in goods accounting for only 8% of Britain’s GDP, and declining relative to trade in goods with the rest of the world.

It is interesting to note that the Government’s economists and their supporters do not fully engage on the economic issue, with only the Brexit-supporting European Research Group (ERG) making the economic case seriously. This does not appear to be because of media focus. Rather, the economic establishment lost credibility at street-level by forecasting an economic slump in the event of Brexit. It was clear that the UK Treasury, the Bank of England, and the IMF set the inputs to their economic models in such a way that a Brexit outcome from the referendum would be dire. Instead, inward investment has increased, defying predictions that European and foreign corporations would sell up. The UK economy is now booming, despite the uncertainty over the Brexit negotiations.

In contrast with the ERG’s positive critique, the Remainers have continually resorted to scare tactics, such as claiming Calais will be shut to Dover’s shipping (denied by the Calais port authorities). They claim all flights from the UK to the EU and flights crossing EU territory will be threatened (ridiculous, being against international aviation law, and Britain’s Air Traffic Control controls transatlantic flights into Europe anyway). They claim that drugs for the NHS will be withheld (really?). And so on. All the establishment Remainers have done is resort to using fear as a substitute for debate.

Remainers have never adequately addressed the issue of democratic accountability either, presumably because they know they cannot win that debate. Instead they skirt round the issue. Logically, given the attestable facts on democracy and economics and having had two years to consider the democratic and economic issues, one would think increasing numbers of Remainers would accept their original position was untenable and revise their stance. Not so. They remain firm as ever, rather like the Vatican and its long-standing denial of Galileo’s discovery.

- Source, James Turk's Goldmoney

James Turk: Why Gold is Money and Will Always be Money

GoldMoney founder and bestseller author James Turk explains his view on the current global economy and gold market.

He explains why gold is and always will be money.

- Source

Gold is Money, Gold Protects Your Wealth

The Dollar Will Eventually Go Over the Cliff. You Can Rest Assured

The action is taking place over here in London. You are seeing this huge backwardation. If you want to put a big order in, say $50 million for physical metal, you can’t get that metal tomorrow. 

You are going to have to wait for a while before you can get that metal. That’s sign to me that gold is cheap. The same thing is happening in silver...