If you bring up gold in casual conversation with people you can get a lot of reactions. You have some who love it as jewelry and want more of it. You have people who give it away for special occasions like weddings. You have gold bugs that talk about a financial collapse, and you have most of academia and the world of finance that call it a pet rock.
Gold has many opponents in the world of finance and academia. I therefore want to present the most common arguments against gold mentioned by James Rickards in the book “The New Case for Gold” (2016). Dispelling the most common myths about gold is just a small part of the book. I have mentioned James Rickards in a lot of my posts lately and I think more people should read his works. I recommend you start with The New Case for Gold if you want to get into his writing. If you like what you are reading you can start on his quartet of books on money with “Currency Wars” (2011). It is well worth your time if you want to know what the possible strategy of the central banks might be. You might say that his predictions are very dramatic, but we have seen very many strange things come to pass over the last year.
I
John Maynard Keynes said that “Gold is a barbarous relic”
(Gold belongs to the past)
First of all, Maynard Keynes never said this about gold. Keynes said “the gold standard is a barbarous relic” (Monetary Reform, 1924). He referred to the gold standard in Britain between 1922 and 1939. Britain, like many other countries, had abandoned the gold standard in 1914 to pursue an expansionary monetary policy during the First World War. When Churchill was Minister of Finance after the war, he tried to take the country back to the gold standard they had before the war again in 1925. The mistake he made was that he did this at the same gold price as they had before the war, even though the country now had a higher money supply. This resulted in deflation and a prolonged depression in the country long before the crash of 1929 in the United States. Had Churchill instead gone in for a higher gold price, much of this could probably have been avoided. In any case, it is a big difference to criticize a gold standard and not gold directly.
II
There is not enough gold in the world to cover world trade
This is perhaps the most common myth about gold, but this myth is incorrect. It is correct that there is a limited amount of gold in the world. Considering the amount of money in the world, at today’s gold price, it is not enough to cover today’s needs. What most people ignore is that even though the amount of gold is almost fixed, the price of gold is not. If the price of gold is higher, gold will be able to cover the money supply, whether it is M0, M1 or M2.
You also do not need to have 100% coverage of the money supply with gold. In 2016, for example, the United States, the Eurozone and China could go for a gold standard with 40% coverage in gold at $10,000 per ounce with the M1 money supply. If gold were also to cover M2, the gold price would be $50,000 per ounce. None of these prices are impossible. (For anyone talking about Bitcoin taking over as a means of payment and going to $100,000 or $1,000,000, this does not sound like an extreme option).
Explanation of money supply:
- M0: The basic amount of money. Money originating from the central bank. Banks’ deposits with the central bank and cash in circulation.
- M1: the narrow concept of money supply. Money immediately available for use. Transaction accounts and cash in circulation.
- M2: the broad concept of money supply or public liquidity. M1 + other bank deposits including bank certificates and money market funds.
III
Supplies of recovered gold are not growing fast enough to cover world growth
Then the question is first which target figure should we use to measure growth. Average GDP growth between 2009 and 2014 has been 2.9%, Population growth has been 1.2% in the same period. Gold has increased by 1.6%. The question may be whether GDP should be a good measure of growth or could population growth be a more correct measure. The money supply growth from the Fed during the period during the period has been 22.5%. Which of these four numbers stands out the most?
IV
Gold was the cause of the Great Depression of the 1930s
This is not true. It was monetary policy in the 1920s that made it possible for a bubble to develop as it did. Many say that the Great Depression in America in the 1930s lasted so long due to experimental policies by politicians that resulted in great insecurity among companies and wealthy individuals. Due to fears of changes in the tax system or regulations, a great deal of capital was put on the sidelines during this period. The amount of money was never limited by the supply of gold during this period in the United States. Many, on the other hand, hung on to the money supply in the United States since the depression in the United Kingdom (from point I) was precisely due to this.
It is true that Churchill, by trying to return to the gold standard, which Britain had abandoned during the war, started the depression on the British Isles (from point 1). However, this depression did not spread much outside the United Kingdom. It took several years before the crash in the US in 1929. Several countries had a boom until then. On the other hand, the Depression spread from the United States to the rest of the world when the bubble burst in 1929 and lasted until World War II.
V
Gold has no return
This argument is completely true, but it is not an argument against gold. That’s an argument in gold’s favor. Gold should not have an interest, gold has no risk whatsoever. Gold is money. Bank deposits and cash are in a currency. There is a form of “inflation risk” on this currency, so there is a reason why we want to receive interest on this money. In addition, there is a risk that the bank might go bankrupt and not repay the money. These are two of the reasons why you should demand interest for having money in the bank. (In addition, the bank lends the deposits for mortgages on which they make money).
Furthermore, there are currently countries that issue loans with negative interest rates. In addition, several private banks in the world have only negative interest rates for those who make deposits. This means that you pay in more than what you get taken out of the bank. In this case, I prefer gold, which is a safer alternative for me to retain purchasing power and which does not have a negative interest rate.
VI
Gold has no intrinsic value
This is a statement from David Ricardo. If you are behind it, you are following in the footsteps of Marxism. Karl Marx used this argument in both the “Communist Manifesto” and “Das Kapital”. Both believe that value arises from capital and labor. The more work, the more value. Not a correct theory. For example; I can spend a long time drawing a picture with the best tools around me. Still, I’m not a good artist and this would result in a picture no one wants to buy. Carl Menger from the Austrian School rather suggests a subjective value. Based on the individual’s wishes and needs, the individual will suggest a value they will provide for a product or service. What the person is willing to pay determines value. Independent of capital and labor. Gold value will vary according to the need for people to have real value. In good times, the need for gold is low and correspondingly the value is low. In bad times, the need is higher and correspondingly the price goes up.
