Foxy Central Bankers & Gold Bullion
Sarel Oberholster
Money has a lot of functions. The two most important traditional functions of money are; money as a means of exchange to settle transactions; and money as a store of value.
Many commentaries have dealt with the problems of fiat money, money not backed by anything but an implied government promise. Money as a single unit has been used throughout history and right up to our current modern economies, concurrently for both purposes. It is a mistake that we are all going to pay dearly for and it is a mistake that we will need to fix some time in the future.
We need fiat money for transaction settlement, no matter how much we may dislike the fiat money system. The sheer volumes of transactions conducted each second in the world have made commodity-backed currencies redundant, forever. It is of no practical use to hunker for a return to a gold standard or any similar standard for money backed by commodities. The time has arrived to realise that we need to devise a system whereby we can separate these two functions of settlement and a store of value.
The mistake that we made was to entrust governments and central banks with both these functions of money. Government and central banks have proved themselves worthy of the task to manage the orderly settlement of transactions. Never in history right up to today have governments been able to resist the temptation not to diminish the value of money through excessive money creation or debasement. Entrusting governments and central banks with the task of protecting money as a store of value is paramount to trusting the fox to watch over the chickens. When the fox watches over your chickens expect lots of losses.
Can we devise an internationally acceptable system that will impose monetary discipline on governments and free the "value of money" market from government control? Floating exchange rates were supposed to do the job and serve well enough as a settlement system but it is a dismal failure with regards to money as an international store of value. Every government in the world is actively involved in the management of the value of its currency. Cheating on the system of free-floating exchange rates has destroyed its value attributes. Concerted money creation by all governments has usurped the interaction between currencies and further undermined what little discipline in a free-floating currency system remained.
Can the world return to a gold standard? I think not. Can gold bullion take over the function of a store of value? A qualified yes, but is gold a "good" store of value? Not always. Any long-term evaluation of gold against other commodities, against consumables, against alternative stores of value such as financial type assets or "hard" assets (fixed property, art, collectables, etc.), will show that gold is a volatile store of value over the long term. History has also proved that having gold will not necessarily protect you against gold price manipulation or confiscation by government. One shortcoming of precious metals as a store of value is that there simply is not enough of it to absorb any significant desire to use it as a store of value at current prices. Significant "store of value" demand may well cause a new mania in precious metals.
Finding a good store of value should become the most pressing economic endeavour of all economically active people in the world. We are in dire need of one. Just don't trust governments to do it for us. Do not believe for one moment that a single world fiat currency would be any less susceptible to monetary excess. Gold bullion and precious metals, whatever their shortcomings as a store of value may be, are still the best stores of value in chaotic times. I expect them to serve us well as an international and fungible store of value until we can find a suitable alternative.
Sarel Oberholster
Bcom (Cum Laude), CAIB (SA)
25 October 2004
E-mail: ccpt@iafrica.com
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