Gold Vs. Fiat Money - The Battle Begins

I had another one of those restless nights. I knew something was wrong, but I didn't know what. It was Gold. Of course it has always followed commodities. It's a commodity. In fact, it is the historical "master commodity". So my prediction that gold should go down was completely reasonable. But it troubled me.

Today, I turned on the computer and I saw it: GOLDEN MADNESS.

I was glib the other day when crossing foils with some goldbugs and I didn't feel good about it afterwards. I knew my thesis was holding up - better than ever - but there was something in their weird, anti-intellectual conspiiracy-theory enthusiasm that got to me. Something in their lunacy was echoing something sensible - however far away from their madness it might be. Even in lunatic conspiracy theory and nuttiness there is often value. The article is a weird, entertaining conspiracy theory about U.S. banks and commodities, but it had something in it that I noted with interest:

In July, India bought 22 tonnes of gold. In August, according to Reuters, India increased its gold purchases by more than 350%, buying more than 100 tonnes of gold.

This figure also represented a 56% increase in purchases when compared to purchases during the same month from a year prior. In Dubai, demand surged as well.

“We are definitely witnessing a surge in demand for gold in Dubai and physical shortages have been reported by many dealers,” said Ian MacDonald, the Dubai Multi Commodity Center’s executive director for gold and precious metals. “We are also seeing demand being driven by currency concerns in the region as many investors perceive the precious metal as one of the few strong currencies.”

Gold jewelry sales in Abu Dhabi soared 300 percent in volume and almost 250 percent in value in August from a year earlier after the metal dropped to nine-month lows, the emirate’s industry group said on Monday.

“It was the best month the market has seen in almost 30 years and it compensated for any drops we have seen earlier this year,” Abu Dhabi Gold and Jewelry Group Chairman Tushar Patni told Reuters.

There are big holes even in this data, but it reminds us of something very disturbing.

But first, a definition: Goldbug : A "goldbug" is a person who not only believes that gold is a good buy for market reasons, but believes that gold not only plays a huge part in the world financial system, but should and will inevitably play a larger part.

In the 1970's America on other developed countries cut any formal relationship between their currencies and gold in an agreement called "Bretton Woods". You'll find "Bretton Woods" listed under "Global Conspiracies To Undermine Rightness and Freedom" in the goldbug/loony-right-wing dictionary.

Ron Paul is the present day's most famous goldbug.

Karl Marx was a great goldbug of the past. Quoth Comrade Karl:

"Only in so far as paper money represents gold, which like all other commodities has value, is it a symbol of value."

Modern capitalist society is based on fiat money, so goldbugs are, naturally, those who do not believe that modern capitalism can survive. They inhabit a surprisingly big portion of the Right wing - all the way from Survivalists through Millenialists to serving Congressman and Presidential Candidate Ron Paul. On the Left, there is a very small fringe of anarchists and Old-Time Leninist/Maoist/Marxists.

I'm sure the Ron Paul fans and the Hard-Line Marxists and Anarchists would get on famously if we put them all in the same room. Let's try that someday.

But what does this gold madness mean?

It means that the situation is far worse than I thought. The disturbing thing we have to remember is that while in the developed world currency crises can cause a lot of displacement, in the developing world people die from them. I'm sure people in India and even Abu Dhabi have a cultural memory of times when the value of the little boxes of notes and coins representing people's life savings evaporated, the next harvest went bad, and they simply died.

Hence, the invention of the credit system, in about the 15th century.

In the modern credit system, even in the face of the kind of financial turmoil that comes once in a century and the prospect of future U.S. government borrowing the like of which we can't even imagine (especially if McCain somehow gets elected), the U.S. dollar is holding steady or going up. The euro is spiking up, the yen is spiking down, so there is no persuasive major-currency trend away from the dollar.

Gold, however, is going mental.

When reason leaves us and no answers come, all we have is fear. This is why we have to fix and EXPAND the modern fiat money system as fast as possible. People cannot be dependent on the value of notes and coins in a little jar. The metal they are made of doesn't matter.

Think of it this way: gold is very pretty and even useful sometimes, but it's also very weak. You can't build anything out of it.

What holds the world together is the labor and trust of people - human beings - Homo sapiens - US.

May you live in goldenly interesting times, goldbugs