 |
| Gold struck a record of US$1,877 an ounce on Friday, still on track for its biggest one-month rise in nearly 12 years in August and its biggest one-week gain since early 2009. Picture: AP |
It is amazing and puzzling the mystical faith of gold on people. From a perspective, gold has minimum utility. Yes, some is used for jewelry and a bit for dentistry and electronics, but essentially gold is useless. At one time, its value was based on the same faith that supports some of the world major currencies. Today, its value is based on less faith than that, because major currencies at least, is supported by their sovereign government’s full faith. Gold is backed by nothing.
A sovereign government can control both the supply of, and the demand (interest rates) for, their currencies. That control over supply and demand gives the sovereign governments complete control over the value of their currencies. A sovereign government would have little to no control over the value of gold, a serious problem when trying to control an economy.
In short, gold is one of those commodities, the value of which is based solely on faith. Just as there have been real estate bubbles, stock market bubbles, oil bubbles, tulip bulb bubbles, sugar bubbles, coffee bubbles, diamond bubbles, dotcom bubbles and real estates bubbles, there have been gold bubbles, the biggest coming in 1980 and perhaps again, today.
The fact that people traditionally have coveted gold is irrelevant to today’s world economy. It also is irrelevant to the future safety of gold, which could disappear with the discovery of, for instance, a massive undersea or antarctic gold vein.
Because gold is supported by no nation, it is less safe than the dollar. Worse yet, it is expensive to own. While saving a dollar will earn you interest, saving gold will cost you for storage, insurance and shipping. In fact, if we were to try to sell or pawn it, we would be lucky to get half of the price we bought it in the first place. In essence it is a wasting asset, the value of which is based on the “greater fool” theory - “A fool buys it because he expects to sell it to a greater fool”.
