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Money Times - November 1, 2016

Posted by Jill Kerby on November 01 2016 @ 09:00

GOLD vs PAPER MONEY: IT’S A MATTER OF TRUST

“The price of gold is the running straw poll of the world's confidence in paper money.” - James Grant, July 2008

I recently had a chance to hold a kilo bar of gold, which is only about six inches by four inches wide and about a half an inch thick.

For such a small object, it was incredibly heavy. It wasn’t buffed to a high sheen like the gold bars that are stacked in central bank vaults (which weigh 400 troy ounces or 12.4 kilos) but was slightly matt in texture and all the more lustrous.

Readers of this column know that I believe that precious metals have a small place – 5% to 10% worth - in a person’s net worth of wealth assets, typically the value of your paid off home, cash savings and pension fund. Occupational pension schemes, for example, are increasingly likely to include precious metals (silver and perhaps platinum) as part of a diversified investment fund. They see gold rare, precious and immutable, as do I, as a form of insurance I hope I’ll never have to use.

According to Aristotle, who advised Alexander the Great about these things as he set about creating a vast empire, ‘good’ money needs to be durable; it must not fade, corrode or change over time. It must be portable, and be easy to carry and move, with a high value relative to its weight. It must be divisible or ‘fungible’ and be able to divide into smaller units of value. It must have intrinsic value, that is, contain its own worth and lastly, it has to be ‘acceptable’, that is, be accepted to another party to complete a transaction.

Precious metals, especially in coin form, tick each box. The paper version of money we use originated as goldsmiths ‘receipts’ for the large amounts of physical gold and silver that Renaissance merchants owned, but didn’t want to risk travelling with. (Goldsmiths became the first bankers.) It was only in the last century that paper money bills stopped representing an equivalent amount of gold or silver. 

Today, there is no equivalent value of gold or silver in any currency issued by central bank to back up the number and face value of dollars, euro, pounds, yen, rubles and renminbi in circulation.  The intrinsic value of the money we use is literally only worth the cost of the paper, ink and base metals (in the case of coins).

In our increasingly ‘cashless’ world, tens of trillions worth of new money has been printed since the 2008 financial crash alone – mainly digitalised on the central banks’ currency computers. It is stored on on-line accounts and transacted via computers, debit, credit and pre-pay cash cards and smart phone wallets. 

Which brings me back to why I was on TV3 the other day with Mark O’Byrne of Goldcore.com, the Dublin gold bullion dealers, discussing gold.

There have been several significant Millennial financial crises ranging from the 1999-2000 NasDaq crash; 9/11; the 2008-2012 Great Recession and Greek crisis and now Brexit. The so-called War on Terror and subsequent migrant/refugee crisis has had massive financial repercussions.

The price of gold always reacts in uncertain and fraught geopolitical and economic times. Back in 1999 an ounce of gold was worth the equivalent of c €350 an ounce and at time of writing, €1,164. By the end of 2007 it was c€500.It peaked in late September 2012 at €1,365 in tandem with the Greek/Euro crisis.

The price of gold goes up and down as UK holders know: gold is up nearly 44% in the past year. Nevertheless it has a remarkable ability to maintain its intrinsic value, especially when every effort is made to artificially create price inflation by devaluing currencies or embarking on endless campaigns of QE – quantitative easing that causes savings and bond yields to collapse.

The banking sector is fragile. The debt crisis continues. Gold is dismissed by Keynesian economists as “the barbarous relic” that pays no interest. But they also hate cash which they say we are saving too much, to the detriment of “economic recovery”.

The cashless society is nearly here. Nil to negative interest rates are becoming  reality, but with no cash, there is no opportunity to take your money out of the bank and stick under a mattress. It is entirely at the mercy of the manipulators to tax with negative interest rates or confiscate in the event of a failed bank ‘bail-in’.

The depreciation of the money we use continues relentlessly. Gold has consistently held its value as this small reminiscence shows:

In the summer of 1982 the owner of the small newspaper where I worked set up a good VHI adult plan for the staff. It cost about Ir£360 old punts, which I couldn’t afford. Meanwhile an ounce of gold back then was worth about Ir£355.

Last summer, 34 years later, my Laya Healthcare Simple Connect Plus adult plan cost me €1,160. As I write this, the price of an ounce of gold in euro is c€1,164. 

Aristotle was right. And I bet Laya would take an ounce of gold as payment too.

Do you have a question for Jill?  Please email her directly at jill@jillkerby.ie or write c/o this newspaper.

 

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