Make New Friends But Keep The Old

Gold Bars
Photo courtesy of Creative Commons


Most of us have at least a little bit of it in rings, necklaces, bracelets: Bling.

Some people own more gold than just jewelry.

They keep it in coins, medallions, or bars hidden away somewhere secure.

Why own gold?

The BBC’s World Service News Magazine’s Justin Rowlatt did a luminous piece on it, in 2013, entitled Why Do We Value Gold? observing that gold is one of the eight “noble elements” on the periodic table.

These are known as the noble metals, “noble” because they stand apart, barely reacting with the other elements.

Gold’s relative inertness means you can create an elaborate golden jaguar and be confident that 1,000 years later it can be found in a museum display case in central London, still in pristine condition.

Gold has one other quality that makes it the stand-out contender for currency in the periodic table. Gold is…golden.

All the other metals in the periodic table are silvery-coloured except for copper – and as we’ve already seen, copper corrodes, turning green when exposed to moist air. That makes gold very distinctive.

“That’s the other secret of gold’s success as a currency,” says [Andrea] Sella, [a professor of chemistry at University College London]. [DR1] “Gold is unbelievably beautiful.”

Beyond the fact that gold is “one for the ages” and the fact that it is “unbelievably beautiful,” however, there is another, well, elemental fact that makes it valuable. What might that be?

Elementary, my dear Watson!

Gold has proven itself—over hundreds and thousands of years—as a secure store of value.

No matter what happens to the bank, the stock market, the bond market, your mutual fund … wherever you stash your extra cash…gold has proven, over centuries and millennia, to have the property of keeping its purchasing power and value. And it’s a real Thing, not just a claim on something else like a stock or bond or mutual fund share.

Of the three properties of “moneyness”— a medium of exchange, a unit of account, and a store of value—gold has unequivocally proven itself as, well, the “gold standard” as a store of value.

Yes, absent a monetary gold standard, the “price” of gold may fluctuate—go up or down—against the dollar, the pound, or any national currency. That, however, is a bit of an illusion.

The value of gold is stable. It is not merely “as good as gold.”  It is gold!

It is the value of the currency, like the dollar, that bounces around. Not the value of the gold. This is called, by some, the “money illusion” It is the monetary equivalent of a stage conjuror’s trick.  Presto change-o!

There is an immense amount of research that proves that gold is a very good store of value.  Consider Professor Roy Jastram’s classic book, The Golden Constant, first published in 1977. As its publisher summarizes it, “The Golden Constant is a unique examination of how gold’s purchasing power has remained consistent over the centuries.”

I wish I had bought his book back then. It now lists for $157 or I could buy it on Amazon for between $95 to $133.49.

That’s a bit rich for my budget. I have already gotten the Memo: gold has a most remarkable quality of holding its value — come what may — over years, decades, a lifetime.  Centuries and millennia, yes. You may read a summary of his findings here.

As The Market Realist reports, “it’s clear that oil and gold move together most of the time.” Since oil is a proxy for energy and energy is a proxy for the real economy what that means is that gold will retain its buying power come what may.

Why is that? Gold is unique and different from all other commodities. Econ 101 teaches us that price, always and everywhere, is determined by only two factors: supply and demand.

Demand fluctuates for all other commodities because they are consumed.

There are only trivial industrial uses for gold. There are cheaper materials for the purposes to be served except in minute quantities, such as electronics, and in even more minute quantities for things such as satellites and spacecraft where weight is a crucial factor. So, demand is stable.

Gold is not consumed. Even that used in electronics generally is reclaimed, because… it’s very valuable. Yes, the minute amounts in satellites and spacecraft is lost. So are those flakes in Goldschläger, the Swiss cinnamon schnapps, but the quantities are so small as to be immaterial.

For the curious among you, the gold in a 750-ml. bottle of Goldschläger is about one tenth of a gram, per Snopes. That’s around $4 worth per bottle. Millions of people would suddenly have to develop an uncommon thirst for cinnamon schnapps to move the needle. Not likely.

So much for demand. Which brings us to supply. Another unique property of gold is that what the boffins call its “stock to flow ratio” is very stable. In plain English that means that the amount of new gold produced, by miners, every year has been extraordinarily stable for centuries, even millennia, giving the world between 1% – 2% of new “above ground” gold every year.

Even relatively massive gold discoveries, like the discovery of gold in the “New World” of the Americas, only caused prices to rise by about 1% – 1.5% a year, a “price revolution” positively banal by modern standards.

That is the secret to gold’s wonderful quality as the best store of value ever discovered. When you see the “price” of gold going up or down in dollars that reflects instability in the dollar, not gold.

When the Federal Reserve is too loose, meaning creating more dollars than the money markets desire, the value of the dollar — which is determined, Surprise!, by supply and demand — goes down.

Then your dollars buy less. When the “price” of gold goes up, inevitably so do other commodities, and, eventually, consumer prices. (This is called “inflation” but is actually “devaluation.”)

When you see the “price” of gold going down, it means the Federal Reserve isn’t creating enough of them. (This is called “deflation,” and other commodities, and, eventually, consumer prices will go down too.)

Meanwhile, gold through thick and thin, over long times, does a much better job than scrip (paper currencies such as Federal Reserve Notes) at retaining its value relative to goods and services. This isn’t doctrine. It is historically irrefutable.

So, if you like the security implied in a historically secure store of value you will stash some of your surplus cash in gold. Think of it as an insurance policy.

That said, what’s the best way to own gold?

Owning physical gold has a few hassles. They are modest yet they add up. Where to safely store it? If in a safe-deposit vault that entails a modest annual cost. Should you insure it? Another cost.

And if you decide to cash some of it in—for an unexpected medical expense, or to fund your next vacation to Bora Bora, buy a new car, make a down payment on a house, for instance—don’t be shocked when you find that the shop you bought it from buys it back, if at all, at a significant discount from market price.

A discount of 3% or 4% is not uncommon. These are businesses, after all, with fixed overhead and a desire for profit. As often misattributed to Einstein “compound interest is the strongest force in the universe.” Little costs add up.

Now at long last, thanks to the biggest breakthrough in the Internet sector, there’s a better way.

What could it be?

To paraphrase an old Girl Scout campfire song:

Make new friends,
But keep the old.
One is blockchain,
And the other, gold.


Come back soon to learn what that could mean for you.

About the Author:

Ralph Benko is editor-in-chief of The Supply Side and, with Charles Kadlec, author of The 21st Century Gold Standard: For Prosperity, Security, and Liberty, and lead co-editor of the Laissez Faire Books edition of Copernicus’s Essay on Money.

Benko also wrote The Webster’s Dictionary: How to use the Web to transform the world and was editor of The Lehrman Institute’s gold standard website. He was one of 23 official witnesses before the Reagan Gold Commission, testifying on the constitutional history of American monetary policy.