by Jim Davies, 4/19/2011
As I write, gold is within hailing distance of $1,500 an ounce, up more than 30% in the last year. What gives?
I knew of course that it would rise, or rather that the dollar would fall - along with other government paper currencies. That's inevitable, since they print what they want, regardless of how much actual, valuable stuff is out there for people to buy and sell. But a rise so rapid is surprising; after all, price inflation may or may not be taking place. Obviously some items are more expensive than a year ago (food, gasoline...) but others, not so much (houses, electronics...)
One reason for the most recent and dramatic rise in gold prices is that at long last, big institutional investors may be bailing out of paper money; and that is very significant indeed. Yesterday, Bloomberg reported that Texas University has placed $1 billion in gold bars. It makes perfectly good sense to me, yet TU is one of the very numerous academies that teach statist orthodoxy, including the ridiculous myth that government can create value with a pen stroke. Seems there may be a disconnect between what they teach and what they do. Good news; reality may be catching up with academia.
If investors like TU are moving from stocks and bonds denominated in government, fiat money into hard money itself, and if millions of individuals do likewise, what is the significance for the future?
Savings are fundamental to prosperity. You work, to produce something people wish to buy; you do it well, you make a profit which is a little more than you need to live on, so you can save that surplus. Notice, only the best or smartest workers can do that; less productive rivals will have less to spare or save. So the use of savings, which is what true investment is, is made primarily by those who are best at their job. This is good; there can be no more successful way to allocate money to investments.
The purpose of investing savings is to make more money yet, by acquiring capital equipment to make oneself (or someone else, in exchange for a return) more efficient. If a widget can be made for 90 cents instead of $1, widget-loving society members are better off; that's what rising prosperity means.
So in a free, zero government society successful producers save some of their profits and invest them in ways to become more productive yet, and so everyone wins, progress is made. But suppose that surplus is ripped off as tax and spent on waging wars or buying votes, or suppose that for some reason they choose to invest their savings in bars of pretty yellow metal and bury them in a vault. How much prosperity does any of that produce?
Obviously, none. They would be confusing money (for that's what gold and silver are) with wealth, and that's a huge mistake. It crippled the Spanish Empire, for example; as the bullion galleons arrived from South America the silver was spent and wealth was enjoyed, for a while; but it was not invested in productive enterprise and so the country became second-class within a century or so.
Thing is, government has made such an appalling mess of money and industry that it makes perfectly good sense to invest in gold rather than shares of real, productive enterprises. Those shares are highly vulnerable, to the next financial collapse that government causes. And that's the tragedy, for productive enterprise is where savings ought to be placed. In the coming rational, zero government society it's where they will be placed. Meantime, for as long as government controls the money printing press, prosperity will stagnate - or worse. The blame doesn't lie with the gold hoarders, but with the money printers.