Thursday, November 4, 2010

Reminder: Gold is a scam

There are two grand gold scams going on now: 'investment' and the 'gold standard'.

Let's start with investment. Gold is protected against inflation, so in times of inflation, buying gold will essentially give a safe currency. Right? Well... In times of inflation, everything that isn't currency follows inflation, so gold is not really any better. But gold has two things going for it.

1) Gold is nearly worthless. Once you get past some electronic use and decoration, what is it good for? You can't burn it for heat, you can't eat it, you can't build with it, you can't do much of anything with it. Also it's very stable so it's just as worthless now and ten years down the road, so obviously you'll never lose.

2) Bubbles! They're not just fun for children and stressed out housewives.

If we expect 10% inflation, we should expect the price of gold to go up by 10%. Of course the numbers will vary due to not everyone having the same predictions, but let's take 25% as a reasonable amount to expect over a year. Gold doesn't do that. It doesn't follow predictions of inflation. It follows speculation bubbles. The price goes up so we all jump o the moving commodity and that drives the price higher and up and up it will go until we all calm down about inflation and suddenly realize we've just bought gold at double the highest sensible price (actually I think even 'normal' gold prices are dramatically inflated, but that's for another day).

When you speculate on a bubble, whether you see it as a bubble or not, you're effectively betting on when it will burst.

Or to look at it another way, who would buy gold? I'm going to use imaginary numbers here for ease of rounding. I think gold will go up to $110 in a year, so I buy it for $100. Who will buy it? The person who thinks that gold will go up further. He must think it will go up. Staying the same isn't beating inflation, it must go up to be a worthwhile investment. So he buys it expecting $120 the next year. And so on.

And now for the glorious gold standard. Did you know that if the US switched to the gold standard that there would be no more inflation and the so-called economic cycle would go away, replaced by joyous prosperity, upward forever?


I find it funny that the gold standard is so often advocated by libertarians and Laissez-faire acolytes would actually be a huge government intervention in the economy. It's not establishing a value of currency: it's setting a price of gold. That would make the US government the biggest influence in the world gold market. And since it isn't going to be easily allowed to inflate the currency when gold prices change elsewhere, the standard would inevitably collapses into a giant wealth-losing machine. Since libertarians and their ilk so often demand a balanced budget, that wealth loss would have to be offset by even higher taxes.

Short version: the gold standard would bleed the average American dry, and quickly.

My opposition to the gold standard doesn't mean I think that current monetary policy is just fine. It isn't. But the gold standard is an incredibly stupid way to fix it. It's not a practical economic idea, it's more of an outdated moral crusade, with about as much usefulness as the old practice of fixing the economy by imprisoning Jews. And no, I am not suggesting that the gold standard is in any way comparable to the Holocaust or the world-wide tradition of anti-Semitism, I'm just using it as another failed idea to fix the economy. I have no idea what Hitler's stance on the gold standard was and I don't care; it's irrelevant.

Monetary policy is important. It matters. The money supply must vary, sometimes up, sometimes down. Maybe less variation than it has had, and we certainly need a better way to do it, but a stagnant money supply fixes nothing.


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