Gold is International Money

2/8/16

Goldbugs get a bad rap. Mostly, I believe, this is because they are often into very silly conspiracy theories, are anti-government, and so on. However, one thing they get 100% correct is that it is good to look into investing in gold and that gold has some special properties. It is important to note, however, that there are good counter-arguments.

Consider the following higly simplified "balance sheet" view showing liabilities and assets of Central Banks, the Banking System, and the Private Sector:

As you go left to right in the table, you move from "Money" and get closer to "Credit". Note that Gold is not the liability of anyone.

Sometimes goldbugs express all of the above as "gold has no 3rd party risk". A good rebuttal to this is that if something has no 3rd party risk it has no 3rd party reward. Risk is defined in project management as something that can either be good or bad. Risk is "an uncertain event or condition that, if it occurs, has a positive or negative effect on a project's objectives". It is only in our common speaking that we think of risk as a bad thing. Companies, for example, are generally profit seeking, and can often manage machinery, marketing, staff, and strategies to make a profit better than say you or I could.

No 3rd party risk does not mean no risk. There is risk with holding something that doesn't have dividends or interest associated with it; it doesn't pay you unless you sell it. Treasuries in the current interest rate environment can have a bad reputation, but gold, and any other chunk of metal, are the true "ZIRP", as they always pay, literally, 0%. If you buy gold you willingly remove yourself from the magic of compound interest. The counter-counter-argument is that it might be argued that the compound interest comes in through the backdoor in the form of money printing/compounding debt, however.

Additionally, we buy gold (oh, and shelter, food, water, etc.) with currency. Therefore, "paper chasing" is sensible, even if you are a goldbug, because logically those with the most "paper" can buy the most gold.

With all that said, however, it remains that gold is "outside money", and thus very important. Whether or not "intrinsic value" is real or means nothing, the fact is people, and central banks, seek gold, and gold has some nice properties. When the game of Monopoly stops, what happens to the money? We go back to knowing that it is just paper. Study up on the pros and cons of gold (and silver while you're at it).