What is gold backed by?

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rickets's picture
rickets
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What is gold backed by?

I wanted to pose a question regarding gold.  I am having difficulty getting behind the logic of buying gold, and perhaps peoples comments may enlighten me.  What is gold backed by?

The major reason many people are buying gold is as a protection against fiat currency that is being diluted/printed too much.  This fiat currency is backed by the government and its ability to generate revenues via taxing its citizens.  As more money is printed, it is worth less.  ok...got that part - and agree that the fiat currency's value will diminish.

So, what is gold backed by?  Other than jewelry, its close to useless.  It is used to produce very few goods.  In other words, other than historical precedence, its backed by nothing.  In fact, clean dirt has a higher value than gold when it comes to surviving or having the ability to produce tangible goods.  Copper has many uses, silver has many uses, but gold almost none.

Gold has held its value in times when single economies have collapsed - but there has been no test of gold in the following combination of events:  a) Global modern economy  b) multiple leading currencies dying  c) modern banking and infrastructure.

I just cant get myself to buy something that is backed by no meaningful use.  I think buying dirt, or fertalizer or the like makes sense.  I can trade it in the future almost regardless of what happens.  Silver might be ok - at least its usefull in many ways.  But gold...just doesnt do anything.  Perception is a dangerous thing to stake ones wealth too - as it changes on a dime.

Thanks for any comments.  And, please note the dirt comment is a bit of a joke so dont go too far on that!

 

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Re: What is gold backed by?

ickets:

So, what is gold backed by?  Other than jewelry, its close to useless.  It is used to produce very few goods.  In other words, other than historical precedence, its backed by nothing.  In fact, clean dirt has a higher value than gold when it comes to surviving or having the ability to produce tangible goods.  Copper has many uses, silver has many uses, but gold almost none.

Gold has held its value in times when single economies have collapsed - but there has been no test of gold in the following combination of events:  a) Global modern economy  b) multiple leading currencies dying  c) modern banking and infrastructure.

Nice post/good question.

With the current problems we are facing, I really don't think gold has much significance in the "real world."

"Over the years, gold has not been a good investment. Actually over the past 200 years, its returns have barely kept up with inflation. Its dismal returns negate any benefit the portfolio receives from so-called reduced volatility. Furthermore, if one holds gold physicals, they would incur an additional cost which would lower returns even further." ---Andy Abraham

In a post collapse world, bartering will take over.

ZIMBABWE: Far From the City's Money, Villagers Barter Again - IPS ...

11-2-2009

Many Zimbabweans are resorting to bartering. "I traded some soap for two buckets of maize meal [Zimbabwe's staple food]. It was far much better than trying to buy it in the shops," said worker Richard Mukondo. "People in the rural areas are even worse off. You can see they are hungry and their clothes are in tatters. They trade in whatever they can produce: tomatoes, onions, chickens and eggs."
www.guardian.co.uk/mon...

Barter only hope for survival in Zimbabwe - Poverty - NZ Herald News
www.nzherald.co.nz/pov...

Nov 2008
"Their country was once the breadbasket of southern Africa, but now more and more Zimbabweans are forced to hunt for sustenance and barter essential commodities in exchange for food."
www.npr.org/templates/...

Aug 7, 2008
Petrol coupons the new currency in Zimbabwe - Mail & Guardian
www.mg.co.za/article/2...

Jan 22, 2009 ... Unemployment is 90 per cent, prices are doubling every day and barter has replaced a worthless currency.
www.aei.org/publicatio...
All meaningful trade in Zimbabwe is done by barter or in foreign currency amid inflation higher than 230 million per cent.

"Turning to foreign exchange or barter is what you would expect in countries that have had inflation of more than a few hundred per cent a year."
www.economist.com/worl...

Bartering in Argentina:
"Street protests have toppled four presidents in two weeks, but Argentina's 21st-century Great Depression is deepening. And it's driving tens of thousands of people to the "National Barter Network," centered at Bernalesa. Last month alone, the network expanded from a half-million to 640,000 families. Here, and at 600 other markets, they're trading goods and services for creditos, which can then be used to purchase other goods and services. "If you don't have any money, this is the only way to survive," says Irma Gonzalez, 46, a who lost her legal secretary job three months ago and is planning a barter-market clothing business. ... Some municipal governments, including the town of Gonzales Chaves in Buenos Aires province, are accepting eggs and chickens as tax payments, using them to feed poor families. The future? "Argentina can become one big barter club," says chemist Horacio Covas, a barter network co-founder. Indeed, the only economy that's growing in Argentina right now is the prehistoric one."

Business; For Wary Argentines, The Crops Are Cash
By LESLIE MOORE
Published: Sunday, December 1, 2002
"City dwellers have also discovered grain as an alternative currency. Ana María Berardozzi, an advertising executive in Buenos Aires, sold her country home for grains. ''It was something of a shock -- my mind is still in pesos or dollars, not sunflowers and wheat,'' she said.
www.nytimes.com/2002/1...

Argentina had to revert back to the barter system in order to rebound.

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Re: What is gold backed by?

Gold 101: Hard Rock and Death Metal

Some nuggets about America's dirtiest industry.

Share of revenues that hard rock mining companies pay for operating on public land: 0%

Estimated value of minerals mined from public lands since 1872: $408 billion

Amount the federal government would collect annually if mining companies paid royalties: $100 to $200 million

Minimum number of times legislation to require royalties or leasing fees has been beaten back in Congress: 14

Amount mining companies save annually due to a tax break on income from public lands: $327 million

Amount a Canadian firm paid for 1,950 acres of public land in Nevada in 1994: $9,765

Estimated worth of the gold on that land: $10 billion

Number of new claims staked on public lands in the West since 2003: 206,688

Number that are within 5 miles of a major city: 16,282

Number that are within 5 miles of a national park: 2,901

Portion of all toxic waste released in the US in 2006 that came from mines: 1/3

Factor by which metal mines emit more mercury than all other industries combined: 9

Amount of waste produced by mining the gold for a single wedding band: 20 tons

Estimated cost of cleaning up the 500,000 abandoned mines in the US: at least $32 billion

Some nice comments on this piece:

You can't eat yellow metal. And as far as cellphones go, as soon as the social order breaks down a bit more, you're going to see those things smacked away from the sides of babbling schizos' heads. With a lead pipe.

http://www.motherjones.com/environment/2009/02/gold-101-hard-rock-and-de...

 

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Re: What is gold backed by?

Not everybody is going to have chickens or eggs or dirt or fertilizer (or ammo, TP, tanks of propane, stored grain, or whatever) with which to barter.  Some kind of medium of exchange is going to be necessary.  After the collapse of paper currency, who's going to trust "Town Bux" or whatever local paper money?  I suppose folks could operate on an IOU basis, but in difficult/desperate times, are you going to sell what you have for a piece of paper promising later recompense?  Why would they need an IOU unless they had nothing useful to offer?

A medium of exchange needs to be something that can't be dummied up out of thin air (like paper money) or is easily procurable outside the market, and so precious metals enter in.  It's not like folks can run out to the local creek and pan up gold or anything (or silver).  PMs are universally recognized as stores of value, IMO.  Now, tomorrow and the day after.

Just mah $0.02...

Viva -- Sager

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Re: What is gold backed by?

SagerXX,

     I agree with you for the short term time frame, perhaps the next 20, maybe 30 years. I'm thinking of a timeline for my children. Major structural changes will happen which will make the essentails of life - water, clean air, clean soil - the only things that matter. PM's only have significance in a world where the basis of life is not threatened. Gold has little value in a world made uninhabitable by our perpetual growth economic paradigm.

The True Cost Of Gold

Gold is always thought of as a “precious metal” due to it’s rare nature and the difficulty (human labor) in obtaining it.

There is a real-life hidden cost of gold however, one that is almost always overlooked. Mining for gold, in this case, an entire mountain, requires the forest to be be clear-cut and laid waste. Cyanide is then used to leach out the microscopic gold particles, which in turns leaks into the water and streams with devastating consequences:.....

There was a good article published this year in, I think, Grist or Mother Jones that was a pretty good expose on the environmental cost of gold mining in America. I wish I could find it.

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Re: What is gold backed by?
xraymike79 wrote:

SagerXX,

     I agree with you for the short term time frame, perhaps the next 20, maybe 30 years. I'm thinking of a timeline for my children. Major structural changes will happen which will make the essentails of life - water, clean air, clean soil - the only things that matter. PM's only have significance in a world where the basis of life is not threatened. Gold has little value in a world made uninhabitable by our perpetual growth economic paradigm.

Concur that that is a possible scenario.  The idea behind my li'l stash of PMs is to get through a possible currency collapse, preserve value until such time as a more useful-everyday thing can be bought with them.  I'll set up my descendants (biological & otherwise) as best I can.  Beyond 20 years from now, they'll have to navigate for themselves...or by then I'll have come up with another brilliant plan.  Cool

Viva -- Sager

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Re: What is gold backed by?

PMs are especially good for people living in apartments/condos within cities and who don't have a lot of space to clutter thier lives up with stuff.

You can't eat gold but you can stick it up your A** and run for the hills! Tongue out

 

Also: correct me if I'm wrong but I'm going to guess that gold has been too expensive to waste on usefull things.

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Re: What is gold backed by?
Ruhh wrote:

You can't eat gold but you can stick it up your A** and run for the hills! Tongue out

That'd be a tad uncomfortable . . . And inconvenient when you're scared goldless . . .   Double-Tongue outTongue out!

 

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Re: What is gold backed by?

 

Gold to me is more honest than Fiat, that is why people lean toward gold.  Human effort and labor went into gold mining.  Fiat is a joke.  I was reading some articles about the evils of fiat and usury, all makes sense.

"Gold and silver force honesty in economic transactions, whereas paper money is economic fraud, an abomination, an unjust weight and measure, oppressive, unjust, counterfeit, and criminal"

 

"It is said that those who loan money need the interest due to inflation and due to the time value of money.  But this is like saying criminals need to commit crimes in order to make money"

 

 

 

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Re: What is gold backed by?

Rickets,

I am sorry all these well-meaning people have not answered your question.  Let me take a shot:

Gold is backed by the fact that it cannot be created at will.  It is backed by the fact that it needs nothing to back it.

I know this is a hard concept to get one's head around at first, but if you think about it for a while it becomes clear.

You say that gold has no use.  That is wrong.  Gold has a very, very important use:  it has a use as money.  Money is absolutely necessary.  It is as important to human society as just about anything else.

But what is money?  As Chris says, it has to be a store of wealth, a medium of exchange, and a unit of account.  Gold and silver are really the only things that fit the bill.  They cannot be created at will.  Every molecule is fungible with every other molecule.  And every person in the world knows what gold and silver are and recognize their value.  You will be hard pressed to come up with any other substance that fits the bill.

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What is Gold Backed By? An Expectation.

Rickets,

I have also pondered the same thing and pretty much agree with you. Here is my limited perspective on the value of physical gold:

  • Gold is just another financial asset like stocks, bonds, etc.. It is not money, its an investment.
  • Its not a store of wealth any more than a stock certificate serves as a store of wealth.
  • Its value is determined by the probability of selling it for more dollars than was given to purchase it.
  • This probability is increased if the majority of the other market participants are seeking to buy gold for whatever reason.
  • This probability is decreased if the majority of the other market participants are seeking to sell gold for whatever reason.
  • In theory, gold could serve as a store of purchasing power and a barter currency in the absence of a government and financial system. But until the government accepts gold as payment for taxes, or ceases to exist, gold is only an investment and nothing more. But even if the government one day ceases to exist, then I would expect that many things would become more valuable than gold (got bullets?).
  • The probability of making a profit on your gold investment is significantly diminished if you must sell it because you have an immediate need for cash. 
  • Its a mistake to assume that in times of panic or crisis, that any investment, including gold, will return a profit. When people are in "panic mode" they are concerned about one thing....survival. Cash is the most flexible means of ensuring survival. 

To conclude, I think that many people buy gold under the influence of many false assumptions. The market has a way of punishing people's expectations and assumptions.

My two cent perspective....Jeff

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Re: What is gold backed by?

The main thing that is backing Gold is desire! It glitters.......women like it so men want it & best of all it is rare. The way the human mind works it has always commanded a big price while other animals could care less LOL.

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Re: What is gold backed by?

Thanks for the responses.

If I am interpreting the responses correctly, it seems most of the pro gold arguments continue to boil down to the idea that gold's value is based on perception and precedence. 

Jag - I like your comment that gold will only be used if the government ceases to exist or in the absense of a financial system- in which case other things will be of much more importance.  This makes sense to me.  That, or its likely people will trade with whatever govt currency has become the strongest - perhaps the Swiss Franc, Canadian Dollar, or the Brazilian Real.  Gold can be a trade, and will rise and fall with supply and demand, but its just blinking lights backed purely on hope and perception imo.

Lemon - I hear ya regarding the historical precedence of gold - but the idea that history might repeat itself is just perception too.  There are lots of things that take time to produce but have no value - so just because gold took time and money and human effort to extract doesnt mean it has value.  I can dig rocks out of my backyard, but that doesnt make them worth anything.

JK - Re nothing backing fiat currency:  My point is not whether fiat currency is abused (it clearly is) - but rather gold has nothing backing it.  I would argue that fiat currency is backed by a heck of a lot more than gold is.  Gold stands on its own, as Yellow said - but its purely on perception and precedence.  Fiat currency is at least backed by our nations efforts as a whole (the govt being able to tax these efforts so to speak).  While the fiat currency can be printed to dilute it to nothing - at least before that happens its backed by quite a bit.  Gold is backed by absolutely nothing - not even a promise to attempt to be worth anything.  Its a rock.  With a dollar, or a treasury bond, I get a promise to be paid back.  That promise, over time, has become suspect - but is still being paid minus inflation.  Gold doesnt have that promise, no attempt, no person backing it, no guarantee that it can be used in the future, and no industrial or survival use.  Again, my point is not to say fiat is a great thing....its just that all the arguments against fiat can be used against gold imo.

 

 

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Re: What is gold backed by?

idoctor - hysterical.  I buy that argument more than any other for putting value in gold.  Dont fight the emotions and desires of the masses!  haha.

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Re: What is gold backed by?

Gold is backed by the Govt more than Fiat paper when push comes to shove. Just look at how important Fort Knox is. Gold was made illegal to own for many years but paper & ink that the Govt has printed has always been ok to own & never been illegal as far as I know. That should tell us alot IMHO.

http://www.cnbc.com/id/34062427

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Re: What is gold backed by?
rickets wrote:

... just because gold took time and money and human effort to extract doesnt mean it has value.  I can dig rocks out of my backyard, but that doesnt make them worth anything.

Gold has nothing backing it.  I would argue that fiat currency is backed by a heck of a lot more than gold is. 

Gold is an extremely heavy, shiny, malleable metal which doesn't tarnish or corrode. For its unique elemental properties, gold is highly valued for both jewelry and industrial uses, such as plating on electrical contacts. Given thousands of years of human history, it is highly unlikely that demand for gold will suddenly, inexplicably disappear.

'Backing' is a non sequitur for objects with intrinsic value. Paper currency needs 'backing' because it's a mere certificate without intrinsic value. Gold is one example of suitable backing -- a substance which has value per se.

Claiming that fiat is 'backed by a heck of a lot more than gold is' borders on trolling. That's too ridiculous to merit a response. Oh by the way -- new record high on the gold futures today. Laughing

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Re: What is gold backed by?

Getting back to reality, Joe2baba just emailed me this little fact on gold:

it takes 3000 gallons of water to produce 1 oz of gold there are a little over 10, 12 oz bottles of water per gallon. 3000 x 10 = 30,000 x approx $1 = $30,000 i think coke and pepsi are way ahead of the mining companies. there is gold in that there water. (which is also why multinationals are cornering the market on municipal water supplies. look at what they do to us with oil . just think what they can do with water) that is some scary research however a friend is a geologist and he looks for minerals for a mining company. the money is made on the claim, ie. whoever owns the claim has it assayed , say 3 grams per ton. they then figure the claim is worth so much at current prices. then they sell the claim to someone and make a profit without one shovel full of dirt being moved. as long as prices keep going up the greater fool theory works very well.

Just a few weeks ago CM stated he was selling all his gold and investing in farmland.

 

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Re: What is gold backed by?
rickets wrote:

I wanted to pose a question regarding gold.  I am having difficulty getting behind the logic of buying gold, and perhaps peoples comments may enlighten me.  What is gold backed by?

The major reason many people are buying gold is as a protection against fiat currency that is being diluted/printed too much.  This fiat currency is backed by the government and its ability to generate revenues via taxing its citizens.  As more money is printed, it is worth less.  ok...got that part - and agree that the fiat currency's value will diminish.

So, what is gold backed by?  Other than jewelry, its close to useless.  It is used to produce very few goods.  In other words, other than historical precedence, its backed by nothing.  In fact, clean dirt has a higher value than gold when it comes to surviving or having the ability to produce tangible goods.  Copper has many uses, silver has many uses, but gold almost none.

Gold has held its value in times when single economies have collapsed - but there has been no test of gold in the following combination of events:  a) Global modern economy  b) multiple leading currencies dying  c) modern banking and infrastructure.

I just cant get myself to buy something that is backed by no meaningful use.  I think buying dirt, or fertalizer or the like makes sense.  I can trade it in the future almost regardless of what happens.  Silver might be ok - at least its usefull in many ways.  But gold...just doesnt do anything.  Perception is a dangerous thing to stake ones wealth too - as it changes on a dime.

Thanks for any comments.  And, please note the dirt comment is a bit of a joke so dont go too far on that!

 

Rickets,

You pose a good question. I would venture that any answer would depend on the circumstance.

IMHO, gold is basically backed only by itself in that there is a finite quantity of it and it cannot be created out of thin air at the will of some moneylender. For this reason it has been a good store of wealth and it's true value against other fiat currencies should vary with the quantity of currrency printed.

Gold as an investment strategy I will have to pass on as I consider that there are market forces at work which I don't understand other than that the moneylenders want /need to maintain FAITH in the fiat currency to keep their scheme afloat. They have a vast quantity of currency at their disposal at any time which can change the market way beyond my power to do anything.

That said, I question whether these moneylenders really understand the exponential function. IMHO, they are acting rather smug, having passed the Federal Reserve Act  and continue to collect tax free interest on the fiat currency printed out of thin air and lent to the government and paid for by the taxpayer. But we are now in the vertical leg of the hockeystick ... very near the top ....and it simply won't work much longer. Then the currency returns to its intrinsic value. ZERO

So what is the intrinsic value of Gold? I'd say the amount of human labor to extract it. That is greater than zero so it should do better than paper. But if you are hungry then you would be forced to trade it in theory for the amount of food that could be produced with the same amount of labor.

IMHO,  having a homestead that can support a family within a community of like minded folks with would be worth more that it's weight in gold!  But gold could still be a unit of exchange that would be much more difficult to corrupt than a greenback!

Coop

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Re: What is Gold Backed By? An Expectation.
JAG wrote:

Cash is the most flexible means of ensuring survival. 

Weimar? Argentina? Taiwan? Brazil? Zimbabwe?  I know you lean on the side of deflation, but ask any Vietnamese person in the US how they got here and most of them will tell you they bought a ticket with the shiny yellow metal that has little industrial value except for space exploration.  Metals can be easily converted to whatever the current currency happens to be, but I wouldn't bet on a pile of inked paper to buy me some food during rough times...

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Re: What is gold backed by?
xraymike79 wrote:

Getting back to reality, Joe2baba just emailed me this little fact on gold:

it takes 3000 gallons of water to produce 1 oz of gold there are a little over 10, 12 oz bottles of water per gallon. 3000 x 10 = 30,000 x approx $1 = $30,000 i think coke and pepsi are way ahead of the mining companies. there is gold in that there water. (which is also why multinationals are cornering the market on municipal water supplies. look at what they do to us with oil . just think what they can do with water) that is some scary research however a friend is a geologist and he looks for minerals for a mining company. the money is made on the claim, ie. whoever owns the claim has it assayed , say 3 grams per ton. they then figure the claim is worth so much at current prices. then they sell the claim to someone and make a profit without one shovel full of dirt being moved. as long as prices keep going up the greater fool theory works very well.

Just a few weeks ago CM stated he was selling all his gold and investing in farmland.

 

Xray,

I don't think CM said quite that. I recall he said it was time to invest in productive land although the bottom may not yet be in on real estate. I do not recall he was selling all his gold to do that just in case others may get the idea it was necessarily time to go "all in" on land!

Coop

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Re: What is gold backed by?

Rickets,

I did not say anything about historical precedence or effort to dig it out of the ground.  You must be confusing me with someone else.

 

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Re: What is gold backed by?

Gold has few practical uses. But that is a big part of it's value. Hear me out. Since it has few uses, very little gold has been used up over the centuries. It is also reasonably finite, easy to divide, easy to assay, doesn't corrode, etc etc.

So let's say you want some of the corn I grew to feed your cow. You can't pay me buy slicing off a piece of cow (at least until it's eaten the corn and grown up). So we need some kind of place holder. It could just be an IOU. And if you are my neighbor I'd probably accept that. But you can see that it's much simpler to give me something that I know can't be copied or can crumble away. Gold is very handy for that. I don't see how one can say it isn't money. It makes an excellent money.

Now of course if I'm starving I'd rather have that slice of cow, but if any kind of workable society exists, some form of money is needed. Look at Zimbabwe. It's very disfunctional yet gold works there as money. I remember someone posted a video about this a while back and it was noted that a loaf of bread cost something  like (as I recall) a tenth of a gram of gold which, at the time worked out to about $2.50 - so with super hyper inflation of their fiat currency, gold held it's value as money.

 

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Re: What is gold backed by?

Gold needs no backing since, unlike the dollar (or any other banknote) it is not a promise to pay in the future, a bond if you will.  It is a real commodity just like oil, wheat, cattle etc. And that is just what money is, the most marketable commodity. Various marketable commodities have been utilised as money in different places at different times. In fact, I recently read an article on www.mises.org describing how after the US invasion of Iraq and the collapse of the Iraqi government, the Iraqi Dinar (as issued by Saddam) was worthless. The people, particularly in the country immediately switched to other commodities as means of exchange. The most marketable and thus money became sheep. Think of it, houses priced in sheep!

For a bond to have value it must be collateralised. Think of a cheque, a cheque is a promise to pay dollars in the future, but what is the value of a cheque that's not collateralised by dollars. Nothing, it bounces!. The dollar is in essence a bearer cheque.

Also, the idea that gold has no practical uses is incorrect. Gold has a very practical use and that use is money.

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Re: What is gold backed by?

What is gold backed by? 

1.  As with any other commodity - scarcity in the face of demand.

2.  The universal consensus that it has value.  If your government decrees that it's not worth anything, it's still worth something elsewhere in the world.  From a logical standpoint, of course this consensus could be changed, but there is no (non-malicious) incentive to and it would be nearly impossible to do.  This is what has been tried by western fiat currencies for the past 40 years.     

2.  Portability.  Much value can be carried around in a very small amount (this is the reason why oil and copper cannot replace it easily)

3.  Difficult to consume/destroy.  Although it is a soft metal and is maleable, it is not typically a consumable.  That means that, unlike oil, the amounts (supply) above ground on earth now will not change radically or exponentially like oil will.  Neither does it corrode.  Therefore, this inherently makes it stable while its value is reliant on demand for it. 

4.  History.  6000 years is a long time for something to retain value.  At one time, Tulips were an incredibly valuable commodity, so was religious influence, leather, uranium, oil, etc.  But the uses and importance of these commodities will ebb and flow depending on our technology.  Gold keeps out of the "technologically useful" realm for the most part and therefore makes it a "transcendental" commodity. 

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Re: What is Gold Backed By? An Expectation.
JAG wrote:
  • Gold is just another financial asset like stocks, bonds, etc.. It is not money, its an investment.
  • Its not a store of wealth any more than a stock certificate serves as a store of wealth.
  • Its value is determined by the probability of selling it for more dollars than was given to purchase it.
  • This probability is increased if the majority of the other market participants are seeking to buy gold for whatever reason.
  • This probability is decreased if the majority of the other market participants are seeking to sell gold for whatever reason.
  • In theory, gold could serve as a store of purchasing power and a barter currency in the absence of a government and financial system. But until the government accepts gold as payment for taxes, or ceases to exist, gold is only an investment and nothing more. But even if the government one day ceases to exist, then I would expect that many things would become more valuable than gold (got bullets?).
  • The probability of making a profit on your gold investment is significantly diminished if you must sell it because you have an immediate need for cash. 
  • Its a mistake to assume that in times of panic or crisis, that any investment, including gold, will return a profit. When people are in "panic mode" they are concerned about one thing....survival. Cash is the most flexible means of ensuring survival. 

Jeff,

I'd respectfully disagree with you on a number of points.  Gold is not just another investment.  It's also a currency.  More importantly, it's insurance ... insurance against currency debasement or collapse or a host of other adverse situations.

It is most definitely a store of wealth.  If your house burns down, gold is still there, in the ashes.  Your stock certificate is just ashes.  Gold will never go to zero value ... unless a honking big, pure gold asteroid hits the planet ... and even then, it still won't be zero.  Stocks and their certificates can become worthless (witness Enron, WorldCom, and a host of others).  Gold will not.  It won't rust, won't corrode, won't burn, won't rot, won't default, won't go bankrupt, won't inflate away to nothing, etc.  And you can carry a valuable quantity of it on your person unlike real estate, farm land, timberland, clean air, clean water, soil, etc.  It's highly portable.  And you can even hide in up your hiney.;-)

Ask the boat people fleeing Vietnam how worthwhile their cash was.  Ask the Zimbabweans if they're panning for stock certificates, cash, or soil.  Ask Germans in the Weimar Republic or Argentinians in 2001 how worthwhile their cash was.  At least 20 countries have experienced hyperinflationary events since 1980 and more will follow.  History has proven over and over and over again that gold trumps cash in economic panics and crises.

With gold, one shouldn't necessarily look to it for a return on capital but rather a return of capital.  But then again, if you've held it since 2001, compared to most stocks, bonds, cash, commodities, real estate, etc., your ROI has been quite good. 

I'm not saying bet the whole ranch on PMs alone but it's a pretty important piece of the puzzle.

But I always appreciate your contrarian POV.

 

 

 

GregSchleich's picture
GregSchleich
Status: Silver Member (Offline)
Joined: Jan 16 2009
Posts: 187
Re: What is gold backed by?
xraymike79 wrote:

"Over the years, gold has not been a good investment. Actually over the past 200 years, its returns have barely kept up with inflation." ---Andy Abraham

I'm sure there are plenty of isolated periods where gold has not kept pace with inflation, but "over the past 200 years" it has actually done very well. It obviously did fine up until 1913, as there was little or no inflation.  And then, since that infamous year, assuming the dollar has lost about 95% of it's purchasing power, as we are commonly told, gold, which was about $20 an ounce at the time, would only have to be about $400 today to keep up. Gold's at about $1150, last I checked. 

thatchmo's picture
thatchmo
Status: Gold Member (Offline)
Joined: Dec 14 2008
Posts: 476
Re: What is gold backed by?

Well, I think rickets questions have been addressed by smarter foks than me, but here's my take on the PM issue.  Of all the "monies" out there, gold is probably the only one that hasn't needed "backing" for thousands of years.  Trusting your survival to gold holdings alone is foolish, I'm sure.   I'm debt free, including my home.  I'm totally out of the market after taking a brutal haircut.  Given what we're learning about the market these days, I can't ever imagine having the guts to get back into stocks.  I'm spending my cash as fast as I can on a useful addition to my home- I'm a weekend-warrior carpenter.  I've bought some more good tools lately,  and some other items that may be valuable in the coming times.  Amazingly and thankfully I've still got some cash left over.  I worry about it's future value, let alone which bank to keep it in.  So I think I'll probably "invest" in some gold in the future.    Having some can't hurt, having none may.  What else should I do given my situation?  I agree with many others that gold is just one part of a well-balanced portfolio- your home, tools for living, some cash, some PM's, family and your neighbors.  Aloha, Steve (Being thankful for all I'm blessed with......)

JAG's picture
JAG
Status: Diamond Member (Offline)
Joined: Oct 26 2008
Posts: 2492
Re: What is Gold Backed By? An Expectation.

Hi ao,

Just wanted to clarify that its just my point of view, and that it is specific to our present situation here in the US. For example:

If gold was money, I could pay my taxes with it. Since I cannot, I have to liquidate it to cash to pay taxes, or to purchase anything within the framework of our economic system. Therefore its an investment and not money in this specific context.

ao wrote:

At least 20 countries have experienced hyperinflationary events since 1980 and more will follow. 

Can you show me one country that has a credit-based monetary system that has experienced hyperinflation? I have yet to find one. It is true that the US monetary system is actually a hybrid system, primarily consisting of debt-based money with a small fiat-money component, but 90% of the inflation in our system is generated by the credit-based money issued by the Fractional Reserve Lending banking system. Credit (debt)-based money is self-liquidating, thus its inflationary impact is always held in check by its eventual deflationary impact. (See The Roving Cavaliers of Credit by Steve Keen for more on the structure of our monetary system)

On a personal note, I want you to know that I have learned something from everyone of your posts, thus I very much appreciate your perspective as well. Thank you....Jeff

 

 

agitating prop's picture
agitating prop
Status: Platinum Member (Offline)
Joined: May 28 2009
Posts: 864
Re: What is gold backed by?

What property fulfills gold's role as a medium of exchange? Of course land has more intrinsic value, but it's not portable. Gold is relatively rare, impossible to counterfeit. (tungsten story not withstanding). Evaluating gold's real value is a worthy logical exercise, though it's pretty ironic if those deriding it, extol the virtue of paper fiat, at the same time.

LogansRun's picture
LogansRun
Status: Diamond Member (Offline)
Joined: Mar 18 2009
Posts: 1444
Re: What is gold backed by?

Gold has:  History, Confidence, and Human Nature backing it.  That's enough for me!

plantguy90's picture
plantguy90
Status: Gold Member (Offline)
Joined: Jan 26 2009
Posts: 271
Re: What is Gold Backed By? An Expectation.

Hi JAG, I respectfully wish to raise some thoughts into your post:

JAG wrote:

If gold was money, I could pay my taxes with it. Since I cannot, I have to liquidate it to cash to pay taxes, or to purchase anything within the framework of our economic system. Therefore its an investment and not money in this specific context.

Well, you used to be able to with gold backed currency, and who made the modern rules now that you cannot?

JAG wrote:

Therefore its an investment and not money in this specific context.

But gold has held a constant value, even if its inconvenient as a transactional form of money.  So I would argue its really not an investment, its just true money being subject to the mispricings of the fiat currency cartel.

JAG wrote:

Can you show me one country that has a credit-based monetary system that has experienced hyperinflation? I have yet to find one. It is true that the US monetary system is actually a hybrid system, primarily consisting of debt-based money with a small fiat-money component, but 90% of the inflation in our system is generated by the credit-based money issued by the Fractional Reserve Lending banking system. Credit (debt)-based money is self-liquidating, thus its inflationary impact is always held in check by its eventual deflationary impact. (See The Roving Cavaliers of Credit by Steve Keen for more on the structure of our monetary system)

If we lived in a village, and I act like a bank and make a daisy-chain of bad loans, I dont see how that in any way affects the price of my eggs, milk, and oil fron their respective producers.  In fact I see them raising prices as insurance against my careless and crazy inflating ways. 

Deflationary concepts seem so "top-down," and I guess my perspective has always been "bottom-up"... am I making any sense here?

 

 

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