Everything Old is New Again: Why Everyone’s Talking about Gold

You always see it in the financial papers and on the market ticker on TV: The price of gold. But why does it move, who needs it, and what are they buying it for? Understanding the market in gold can give you a leg up on most investors, who fail to see the big picture. Let’s start with the obvious question first: With everything else in the world changing so fast, why has gold stubbornly maintained — even increased — its value since the days gold speculators headed west to dig for fortune?
Welcome to the world of reserve currencies. If you have a lot of money, a problem soon occurs: Where to store it? Banks are secure, but what if the currency itself is devalued? Then your millions could disappear in real value over a short period of time, with no heist or bank robber necessary. The short answer to this problem is gold.

Image by Glenn Liming via Flickr

For one thing, it transcends national borders with perfect ease, as selling gold bullion in Melbourne is as simple as selling it in New York or London, with no bank skimming off the top of a currency conversion. But gold itself was chosen for a very good reason: its scarcity. There is only so much gold in the world, and despite focused efforts spanning centuries, no one has ever been able to produce a single ounce more.
By contrast, other currencies can be printed endlessly. Until recently, the dollar has enjoyed de facto status as the reserve currency of the world. But financial mismanagement has put it on the ropes. The business press is too well-connected to spell it out, and the mainstream media too deferent, but the truth is that the dollar’s fall has been inevitable since the late 1990s, and it is this fall that makes it a poor choice as a reserve currency … leaving gold alone to fill the void.

Clinton’s deregulation of the banking system meant that speculation on derivatives could take over the banking system without restraint, and pyramid schemes like this one are bound to collapse sooner or later. Bush’s subsequent tax break to the top 1%, coupled with his costly wars and an acceleration of offshoring, meant that the U.S. needed to print money in order to cover the gap between reduced national revenues and increased national spending. Obama’s gargantuan bank bailouts, ostensibly to fix the problem that Clinton’s deregulation helped create, meant that the Federal Reserve’s printing presses continued to work overtime.

The problem with all of this, again, is easy to understand by analogy: If you’re in a desert, the man with one glass of water is immeasurably wealthy. But if you’re by the lake, the same glass of water is worth next to nothing. Printing more money similarly devalues and dilutes the money already in existence, and so — to answer the question posed at the start — those with a significant amount of money would be well-advised to keep it in a form which can’t be diluted, such as gold.

As such, the value of gold is a strong indicator of the confidence that the global rich have in the other strong currencies in the world. The higher the price of gold, the lower their confidence in other kinds of currency, and vice versa. It can be seen as the canary in the coal mine, and the indicator to keep in the back of your mind as you invest elsewhere. But it is also an accessible investment even for those who aren’t counting their fortunes in millions, and trades in gold can also be conducted intelligently if one has a good knowledge and understanding of the wider economy.

Buying and selling gold might not be something you ever imagined doing on an investment level, but it could be a very sensible trade if you are comfortable navigating the general economic trends it tends to reflect.