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Golden Paperweights, and Other Investments

Posted by
February 10, 2012
in Blog

Why gold isn’t money, steak isn’t food, and you’re not really reading this…

File this one under “you’ve got to be pulling on my leg:” an unsigned editorial at Nasdaq.com makes the utterly risible claims that “gold has no value except as an investment” and “It is only the backing of governments that gives gold any value.” (To add insult to injury preposterously false statements, they also toss in a dig on sound money champion Ron Paul)

Oy, where to begin with these guys? Everything they say in this article is basically as wrong about a subject as you can possibly be while still using correct English. Monetary historians know that gold has long been prized for its beauty and rarity. It’s one of few metals found on the earth’s surface in pure or “native” form, and it’s soft, which make it easy to find and fashion into useful objects. It’s also chemically inert, which means it keeps its luster and doesn’t corrode. Thus gold has been adorning people, buildings, books, and art for millennia. The value comes from the fact that, like that creepy Dutch metallurgist, people just “like goooold.” Only recently—namely since its demonetization—has gold gained an “investment” status, but as I’ve explained here before, “insurance,” and not “investment,” is the proper way to think about people’s non-jewelry gold stockpiles. And even though gold “investment” has been rising steadily for the past 10 years, according to the World Gold Council, 55% of total gold production in the 3rd quarter of 2011 was used for jewelry, art, and industrial uses, and only 45% for investment (the Nasdaq writers erroneously claim that 90% of gold is used for investment purposes).

So like any market good, gold’s value comes from its utility and it’s relative rarity; it has nothing to do with government actions. Gold simply has appealing characteristics that have always made it highly valued by people and cultures throughout history. Moreover, gold is infinitely divisible into small quantities, easy to test for purity, non-corrosive, easy to stamp into coins, and has a high value-to-weight ratio so one can carry substantial wealth with a handful of coins. Taken together, these are the reasons that markets chose gold as the premier monetary commodity. Governmental involvement merely recognized and formalized the results of a spontaneous market process.

So when these Nasdaq jokers make the claim that “gold is no better than paper money,” I have to believe they’ve been living in a cave (without internet) for the past 41 years. The whole freaking point behind a gold standard is that gold keeps its value well precisely because there’s no government manipulation of its value. Governments can’t print gold; its value is market-based (like all goods should be according to us free-market types), not government-based. History is full of examples of governments wiping out the value of their currencies, soaking savers, and wrecking their economies by printing too much money. And yes, call us crazy, but some of us “gold bugs” are worried that it could happen again, even here in the mighty U.S.

As a former NASD-licensed broker, I must say I’m embarrassed by the level of incompetence displayed in this article. Somebody needs to tell these guys that April Fool’s Day is still about 7 weeks away—quit pulling on our legs and get back to tracking tech-stock bubbles.

(Along this same theme, enjoy this video. -ed.)

Tyler Watts is an assistant professor of economics at Ball State University.

image: www.flickr.com/hto2008

2 Comments

  1. karatbars gold September 3, 2013 11:35 AM

    For me, Gold is still money and that's why people do make it as one of their secured investments.

  2. Iraqi Dinar July 15, 2013 4:17 AM

    Investment is basically based on speculation. As one speculates profit, he or she invests money in the project.