Gold is arguably a fiat currency too?

[markrmau]

"Gold is arguably a fiat currency too?"

I only say this because even though gold is a physical material (unlike the US dollar which is a concept), you have to accept that 1/3 (or whatever) of the physical gold ever mined is held in central banks.

This sounds like a currency which has a value ascribed to it which may deviate from it's real worth (based on physical supply and demand). It is only a hedge if others still want to buy it when/if the :fan

Thoughts?

 

[wayneL]

"Gold is arguably a fiat currency too?"

I only say this because even though gold is a physical material (unlike the US dollar which is a concept), you have to accept that 1/3 (or whatever) of the physical gold ever mined is held in central banks.

This sounds like a currency which has a value ascribed to it which may deviate from it's real worth (based on physical supply and demand). It is only a hedge if others still want to buy it when/if the :fan

Thoughts?

Ahahah!

Interesting point of view...dare I say....heresy even? LOL ( I don't hold a view on this, but I'm sure there are passionate views to the contrary)

I might post this on a few commodity forums and see what they say....could be interesting.

But as to definitions:

fi·at Audio pronunciation of "fiat" ( P ) Pronunciation Key (ft, -t, -ät, ft, -t)
n.

1. An arbitrary order or decree.
2. Authorization or sanction: government fiat.

 

[Smurf1976]

I'm a little sceptical that central banks actually hold as much gold as they claim. There's been plenty of commentary which basically makes the observation that someone has been selling an awful lot of gold in recent years and has done so in a calculated, co-ordinated manner.

If it were professional investors then it seems unlikely that they would be selling when the price is clearly trending upwards. Possible but unlikely. And I haven't seen any evidence of mass liquidation of gold jewellery etc. It's unlikely that individuals would act in a co-ordinated manner whenever the price happened to move up even slightly. So that leaves central banks...

In any event, let's just assume for a minute that central banks do in fact hold all the gold they claim. If they hold one third of the total then the most that could be sold would add 50% to the non-central bank world supply. In contrast many countries have been inflating their fiat currencies somewhere int the order of 10% per annum in recent years. Something which clearly couldn't be sustained with gold.

So the worst case IMO is that gold could temporarily become effectively a fiat currency until central bank reserves ran out. Depending on how much they sold (presumably in order to suppress the price) that could happen rather quickly. Worst case they could maintain control for perhaps a decade by which time they would be completely out of gold.

Of course the mining supply adds to above ground gold reserves, but only slowly and at very high cost. Unless somone discoveres a truly massive gold resource, the mining supply is limited on an annual basis. As the above ground gold reserves (slowly) increase, it becomes ever harder to achieve a given % increase from mining more of it.

In short I could accept the notion that gold could act like a fiat currency to a limited extent in the medium term, and absolutely like one in the very short term. But not in the long term.

 

[rederob]

Poor misguided souls!
Gold can never be fiat currency.
Irrespective of what you do to an ounce of gold, it will always be an ounce of gold.
If a government mints an ounce of gold and declares it to be worth AU$500 (that is, by governement decree - or "fiat"), would you buy it?
The answer is a deafening NO.
That's because the rush to the mint from others that realise it is actually worth about $750 today will have killed you!.
"Commodity money" - such as gold - is a desirable hedge against inflation as it does not matter how much your fiat currency is worth, your weight of gold is worth its weight in gold in every country of the world. And over time this value does not change.
Makes you wonder why we moved away from a gold standard.
No it doesn't!
You can't inflate gold.
But you can print as much money as you like.
Put your hand up if you want more money.
"Alan, fire up the printing presses one more time - for old times sake".

 

[wayneL]

Poor misguided souls!

I'm wondering why you found this opening comment necessary. This is how forums degrade into cesspits of acrimony.

But for that, your post was constructive, lets keep it like that bit.

Cheers

 

[markrmau]

Hi Rederob,

I am arguing that gold is really no better than a fiat currency.

You couldn't eat it if there was a nuclear holocost. It has minimal industrial uses. You cannot derive energy from it. You can always dig more out of the ground - just like printing money (though the amount being dug out of the ground is declining).

The only reason POG is so high is that the central banks made an agreement to limit the volume of sales each year.

I also wonder if the recent run in gold has been partially due to a nice hedge fund play. Listed gold stocks have far higher liquidity than the gold market. Why not buy up large amounts of gold stocks, then buy heavily into the gold market? Because of illiquidity in gold market, the hedge funds could move it considerably. Then mainia would set in....

Just a few thoughts.

 

[rederob]

Wayne
If you do not understand “context”, don’t predicate a post with an unnecessary remark.

markrmau wants to argue that gold is really no better than a fiat currency.
To do this without understanding the nature of a "fiat" currency is difficult.
Gold can never be a fiat currency because its ultimate value is intrinsic and cannot be universally decreed.
The substance to markrmau's contention is not really about "currency", but about "utility".
Fiat currency does not store wealth or value and is totally useless after a holocaust - at least gold could be traded for food or clothing or shelter in the absence of any other form of money.
Gold is the ultimate store of value (I won't say wealth as too many people think lots of money makes one wealthy).
Gold has the most important of all industrial uses: It is used whenever something made is needed to last forever, such as on the rooves of temples at one end of the spectrum to life saving implantable medical devices at the other.
I could have mentioned wedding rings but thought that marriage is not nowadays contemplated as a "forever" thing.
Let's now look at another of markrmau's contentions: "The only reason POG is so high is that the central banks made an agreement to limit the volume of sales each year."
To keep this brief, let's assume he is right. What happens when banks run out of gold? Oh dear, gold goes through the roof. So Central Bankers are unwittingly the architects of higher gold prices!
Central Bank sales are limited to 500 tonnes a year. That's a lot of gold, so where is it going? And why does the price of gold not keep falling while this huge quantity is being offloaded?
Perhaps we can come back to this issue later.
markrmau may not have a good grasp of the "liquidity" of gold markets versus equities, but this is not a problem to the overall theme. Just remember that for most of the week gold is traded 24 hours a day: Find me an equity that comes close and I will change my mind.
markrmau finally moves on to the role that hedge funds play. This is where it gets murky as I think there is a case to be made about the ability of funds to manipulate price movements.
Put the manipulation to one side and what do you have. A fifth year of rising gold prices.
So now we go back to economics 101 (to keep this post short). When demand outpaces supply we expect to see prices rise.

Unfortunately this has drifted from markrmau’s fiat currency theme in order to respond briefly to his other points. To get back on thread I welcome more arguments that suggest gold is no better than a fiat currency. You may then begin to ponder why the price of gold has a long way to run in the present economic climate.

 

[bvbfan]

Who actually knows how much the reserve banks actually hold in gold?
Consider this, the largest claimed holder of gold is the US Fed, yet it has not had an audit of its gold for probably 30 years, how much of it really exists as gold and not some paper promiss to return gold.

I remember some wanted to have a picture taken with the Perth Mints supply but was declined, rumours were made that it was declined because they only had a few bars left.

When reserve banks become as accountable as companies are with reporting transactions and holdings then I'll believe they have the gold they claim

 

[wayneL]

Wayne
If you do not understand “context”, don’t predicate a post with an unnecessary remark.

markrmau wants to argue.....

I don't care who understands context or who wants to debate fiat currencies, gold, or the particular shade of blue a blue sky miner is.

The point is, folks are entitled to put their view forward without being satirized or insulted. If you disagree, go ahead and state your case.

Your points are good ones. But don't try to elevate your point of view by casting aspersions on peoples intellect or "understanding". It is not necessary, as your argument should be able to stand on its own merit.

In other words, play the ball, not the man.

Now, to the topic at hand....

Without having an opinion either way, I hereby submit this article for your collective perusal:

http://www.gold-eagle.com/editorials_02/tlaga011902.html

GOLD STANDARD = FIAT IN DISGUISE

Copyright 2002 J.N. Tlaga

In his occasional paper THE RETURN TO GOLD 1925, Cambridge University scholar, Donald E. Moggridge, tells us that it was Sir Isaac Newton, who, back in 1717, set the price of gold at 77 shillings 10 and 1/2 pence per standard ounce (22-carat, .9167 fine), a price that endured for two hundred years..............

There appear to be extended periods in history where gold has been assigned a fiat value...including during the 20th century.

Cheers

 

[markrmau]

Hi All,

Even though I say 'argue', you should really understand that I don't really care one way or the other. If everyone is saying "black", then I have an irresistable urge to say "white". I haven't shorted gold, in trading I am a pragmatist.

Currently, it is accepted by all that gold is the ultimate hedge for times of woe. I am saying that the only reason POG is so high is that everyone believes that it is the ultimate hedge.

"Belief" is the key word here. It is only a hedge because everyone believes it is a hedge. How is this different to a fiat currency where everyone believes that $1US has a certain value?

Now to a few specific points:
"Gold can never be a fiat currency because its ultimate value is intrinsic"

How can you say gold has a high intrinsic value when a large portion of gold ever mined is stuck in bank vaults? Gold is not used for medical implants as you stated (titanium is used for strong casings and platinum is used for electrodes - in a previous life I worked for the hearing implant manufacturer Cochlear). Gold is used in some integrated circuit packages, but not in particularly large amounts.

About the liquidity of the gold market: well it doesn't matter what hours the market trades. I understand that the daily $ turnover of the gold market ir relatively small (ie low liquidity) compared to gold stocks on listed exchanges. I could be wrong. When the kids go to bed I will check on this.

Regarding economics 101/ supply and demand, the US dollar is also responding to these fundamentals. In 2005, while most economists were toeing the line in saying that the US$ would fall, it actually rose because there was a demand for it. Asia was saving and piling into US$. Even more so than the US consumer was spending - buying products from asian countries.

Is there a particular 'gold bug' board I should be discussing this on?

Also, interesting article Wayne. I had not searched for previous arguments along this line. A bit of heresy does wonders for the system. LOL.

 

[wayneL]

As far as the ultimate hedge?

The hedge must have a value to someone in calamatous times. It depends how bad things get. Gold will be worthless if there is no financial system. (If we want to get really apocalyptic)

Perhaps oil/gasoline? Cans of baked beans?

...perhaps even can openers, who knows?

 

[Milk Man]

Well I for one didnt properly understand the fiat currency definition. All I knew was that it wasnt the gold based system that used to exist. Saying that gold is arguably a fiat based system made me think - its only on paper not physical. From this I can now deduce that gold is not a fiat based system as such but one could draw a pretty good parallel between the means of operation between currency and gold. A degree in economics would be nice.

I also have a fiat tractor which is not always there when its supposed to be .

 

[markrmau]

The hedge must have a value to someone in calamatous times.

Yes, what good would gold be if you wanted something to eat? Only if the other side of your gold/food barter swap ascribed some arbitrary value to gold. A fiat currency perhaps?

 

[rederob]

There seems to be a lack of understanding of what constitutes a fiat currency. And there also seems to be no stated appreciation of how or why gold is a store of "value", as it has been for millennia.

Let's go through some of the posts:
Wayne presents a link to an article about the "gold standard" and it being equal to a fiat currency. As the gold standard disappeared almost 35 years ago, it remains an anachronism.

Markrmau then presents some points:
About gold as a hedge against inflation; the corollary to his contention is that there is nothing that can be a hedge against inflation as it is only based on what we "believe". He then asks, "How is this {gold} different to a fiat currency where everyone believes that $1US has a certain value?" The answer is that an ounce of gold is always an ounce of gold, but the value of the dollar changes every day. To prove this you can now buy "electronic" gold in various forms - search "goldmoney" for one such means.
I said the value of gold is "intrinsic". The fact that a lot of gold is in bank vaults is actually a measure of its intrinsic value. If it was of low value it would not be in bank vaults.
Gold is used in many things, including medical implants - I have had a gold capped tooth for over 20 years - but look here for more uses: http://www.azom.com/details.asp?ArticleID=1899#_Current_Applications_of
I cannot say that I know too much about the volume or value of traded gold as I don't use that information in anything I do. However, from the US commitment of traders report (http://www.cftc.gov/dea/options/deacmxsof.htm) we can see that open interest changed by over 46,000 positions during the week, and I believe each contract (of 100 ounces) was worth over $56,000. Then you must add the traded volumes on LME and TOCOM and anywhere else that trades gold 24 hours a day. How these values compare to daily traded gold equities I do not know, but the point made was actually about "liquidity" of trading, and that is a function of total number of trades and not value.
markrmaus next comment about buying of the US dollar based on demand needs to be treated with great caution as countries, especially Japan (and latterly China), regularly pile into the US dollar in order to suppress the value of their respective currencies in order to maintain a trade cost advantage.
And yes, there are numerous gold bug boards eg http://www.gold-eagle.com/cgi-bin/gn/get/forum.html

Wayne also stated, "Gold will be worthless if there is no financial system".
Gold as a means of trade and money pre-dated financial systems as we know them today and would equally quickly replace them if they disappeared tomorrow.

markrmau's last post: Yes, what good would gold be if you wanted something to eat? Only if the other side of your gold/food barter swap ascribed some arbitrary value to gold. A fiat currency perhaps? simply proves the case that gold bugs regularly present, that gold is money.

Finally, as gold has intrinsic value it cannot - by definition - be termed a "fiat currency".

 

[Smurf1976]

Finally, as gold has intrinsic value it cannot - by definition - be termed a "fiat currency".

Agreed. Though it's possible that gold could, under certain circumstances, behave as though it was a fiat currency.

 

[wayneL]

Agreed. Though it's possible that gold could, under certain circumstances, behave as though it was a fiat currency.

What is the "intrinsic value" of Gold?

(Just playing Devils Advocate)

 

[rederob]

What is the "intrinsic value" of Gold?

(Just playing Devils Advocate)

Answer: First it is that value it will always have because it is what it is. Then it is the value one will attach to it because they understand what it is. And just as we are all different, some may be willing to trade gold for food, or gold for shelter. Some may want to hoard it to achieve power and some may want to acquire it to do good.

To suggest that gold might in some circumstances behave as a fiat currency is a contradiction we call oxymoronic in English. If gold were to behave like a fiat currency it would imply that every person on earth understood that the only value that gold had was the value given to it by one or more governments and that it had no use outside its use as money.
In reverse, it would mean that our various world fiat currencies have intrinsic value because they can be used for a mulitude of purposes outside their use of money.
Try and do origami with our polymer notes and you will see how useless they are apart from serving as money.

I am off to find the Milk Man and shall now offer to buy his Fiat tractor with some gold.

 

[Smurf1976]

What is the "intrinsic value" of Gold?

(Just playing Devils Advocate)

Scarcity, portability and durability. It is valuable because it is scarce relative to most other materials on earth, is readily portable and extraordinarily durable. These factors in themselves make it a desirable material to own (humans always want what is difficult to acquire).

Gold has become universally recognised as a store of value for these same properties whereas it would be impractical to use, for example, live pigs as a store of value since they have high maintenance costs, deteriorate, can be reproduced at minimal cost etc. Live pigs are too easy to produce thus facilitating currency debasement. Gold's scarcity is key to it's value. Hence why zinc etc aren't recognised as a store of value in the same manner as gold is despite having similar properties apart from scarcity.

 

[michael_selway]

Scarcity, portability and durability. It is valuable because it is scarce relative to most other materials on earth, is readily portable and extraordinarily durable. These factors in themselves make it a desirable material to own (humans always want what is difficult to acquire).

Gold has become universally recognised as a store of value for these same properties whereas it would be impractical to use, for example, live pigs as a store of value since they have high maintenance costs, deteriorate, can be reproduced at minimal cost etc. Live pigs are too easy to produce thus facilitating currency debasement. Gold's scarcity is key to it's value. Hence why zinc etc aren't recognised as a store of value in the same manner as gold is despite having similar properties apart from scarcity.

Gold however does nto pay interest, whereas if u converted to cash, u earn interest 5-6% currently at a bank risk free

 

[rederob]

Gold however does into pay interest, whereas if u converted to cash, u earn interest 5-6% currently at a bank risk free

Pray tell how wonderful that interest rate is for you during a deflationary period.

But the proposition is somewhat unclever in a secular bull market for gold which is compounding gold's value well over 10% pa.

On the subject of this thread, however, it does seem that as gold does not attract interest it would not be a good candidate as a fiat currency after all.