84 replies to this topic

[Steve Netwriter]

This thread is created from posts originally on the gold thread after this post:
http://www.greenenergyinvestors.com/index....ost&p=51628

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I've recently had someone on another forum insisting that gold is a commodity.
That inspired me to look at the history of gold and create this chart, to make the point that our fiat money system, and "gold is a commodity" paradigm is quite a short one.
I've added it to the basic guide, but would appreciate any critical comments or suggestions for improvement.
My aim was to have something with which to explain in a really simple graphical way why I think gold is money

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The History of Gold

There is a tendency to ignore history. We do so at our peril.
We also tend to think only recent history is relevant. This is misguided.

This is the history of gold:




Jewellery
4000 BC - A culture, centered in what is today Eastern Europe, begins to use gold to fashion decorative objects.  The gold was probably mined in the Transylvanian Alps or the Mount Pangaion area in Thrace.

First Use As Money
1500 BC - The immense gold-bearing regions of Nubia make Egypt a wealthy nation, as gold becomes the   recognized standard medium of exchange for international trade.
The Shekel, a coin originally weighing 11.3 grams of gold, becomes a standard unit of measure in the Middle East.  It contained a naturally occurring alloy called electrum that was approximately two-thirds gold and one-third silver.

China
1091 BC - Little squares of gold are legalized in China as a form of money.

Great Britain
1066 AD - With the Norman conquest, a metallic currency standard is finally re-established in Great ritain with the introduction of a system of pounds,  shillings, and pence.  The pound is literally a pound of sterling silver.
1284 AD - Great Britain issues its first major gold coin, the Florin.  This is followed shortly by the Noble,      and later by the Angel, Crown, and Guinea.
1377 AD - Great Britain shifts to a monetary system based on gold and silver.

US
1787 AD - first U.S. gold coin is struck by Ephraim Brasher, a goldsmith.

Default
1971 AD - On August 15, U.S. terminates all gold sales or purchases, thereby ending conversion of foreign officially held dollars into gold.



References:

The History of Gold - National Mining Association
http://www.nma.org/pdf/gold/gold_history.pdf

[romans holiday]

Nice graph Steve!  

I am convinced that a lot of confusion surrounding the nature of gold springs from an ignorance of both the nature of fiat money and the historical role gold has always played. Prejudices are no match for education.... or reality for that matter.

[Steve Netwriter]

Nice graph Steve!

Cough cough

"but would appreciate any critical comments or suggestions for improvement."

Thanks. I guess that means you don't see any obvious errors.
But I'm now getting sufficiently enthusiastic to be prepared to spend more time on it. Maybe simple is best, and more would ruin it, or maybe there is something better I could do.
I wonder for example whether I could put monetary inflation on it and the quantity of gold mined, to make that point (if I had the data !).

[Steve Cook]

I noticed that chart GF. Good isn't it

-----------

I've recently had someone on another forum insisting that gold is a commodity.
That inspired me to look at the history of gold and create this chart, to make the point that our fiat money system, and "gold is a commodity" paradigm is quite a short one.
I've added it to the basic guide, but would appreciate any critical comments or suggestions for improvement.
My aim was to have something with which to explain in a really simple graphical way why I think gold is money

--------------

The History of Gold

There is a tendency to ignore history. We do so at our peril.
We also tend to think only recent history is relevant. This is misguided.

This is the history of gold:




Jewellery
4000 BC - A culture, centered in what is today Eastern Europe, begins to use gold to fashion decorative objects.  The gold was probably mined in the Transylvanian Alps or the Mount Pangaion area in Thrace.

First Use As Money
1500 BC - The immense gold-bearing regions of Nubia make Egypt a wealthy nation, as gold becomes the   recognized standard medium of exchange for international trade.
The Shekel, a coin originally weighing 11.3 grams of gold, becomes a standard unit of measure in the Middle East.  It contained a naturally occurring alloy called electrum that was approximately two-thirds gold and one-third silver.

China
1091 BC - Little squares of gold are legalized in China as a form of money.

Great Britain
1066 AD - With the Norman conquest, a metallic currency standard is finally re-established in Great ritain with the introduction of a system of pounds,  shillings, and pence.  The pound is literally a pound of sterling silver.
1284 AD - Great Britain issues its first major gold coin, the Florin.  This is followed shortly by the Noble,      and later by the Angel, Crown, and Guinea.
1377 AD - Great Britain shifts to a monetary system based on gold and silver.

US
1787 AD - first U.S. gold coin is struck by Ephraim Brasher, a goldsmith.

Default
1971 AD - On August 15, U.S. terminates all gold sales or purchases, thereby ending conversion of foreign officially held dollars into gold.



References:

The History of Gold - National Mining Association
http://www.nma.org/pdf/gold/gold_history.pdf

Outstanding post

Very informative

Thank you

[Steve Netwriter]

What would you say to this ?

Cant you see that many many commodities have been used as currency over time? Land, food even water. Gold is not different, it is simply a tangible good which has the ability to be bartered. That doesnt make it money, that makes it .... a commodity!
This false differentiation is being pushed by people with a severe agenda to make a lot of money form gold over the next couple of years. I know this first hand and it makes me quite worried for people who see gold as something it simply is not. Same as people made assumptions over property... that were a bit.... naive.

[Layman]

What would you say to this ?

I actually agree with it to a certain extent. It's extremely difficult to argue against.

I think you have to appreciate that the term "commidity" is quite wide though. Some commodities can be easily produced (e.g. farming commodities), and therefore it is those with a far more restricted supply that became used as money. But I agree this could be attributed to facts around ease of use (making a load of diamonds all the same size and trading them is pretty difficult) rather than necessarily anything being that "special" about gold.

Today, though, gold still carries this special tag. Exchanges have been set up to trade it, bodies to stamp its authenticity, and uniformly sized trading quantities (coins and gold bars). It's rate of consumption is quite low so it is considered a stable investment.

[romans holiday]

What would you say to this ?

Show him the graph Steve! You know... the graph you just made! Nice and simple for numbskull numpties such as these.   

And much easier [more economical] than trundling out all the arguments of why gold is perfect for performing the function of money..... it is scarce... it is divisible.... etc etc etc...

People get unnecessarily confused about gold [leading to endless arguments] because they think either it can only be money or only be a commodity, without realising it can be both of these.  Gold [and the historical chart ] teaches an overly analytical mind a good lesson.

The author is labouring under a false dichotomy.

[Steve Netwriter]

Show him the graph Steve! You know... the graph you just made! Nice and simple for numbskull numpties such as these.   

And much easier [more economical] than trundling out all the arguments of why gold is perfect for performing the function of money..... it is scarce... it is divisible.... etc etc etc...

I did.
That was his reply  

I find his statement rather like that of a politician. Difficult to dissect.

It looks like I will now have to write a brief summary of why gold IS money, and why it acts as a safe haven.
Oh, and what money is  

Maybe I should just set James Turk onto him  


Bobsta,
Yes, but I think it needs dissecting. Otherwise one might reach the conclusion that we should be buying water as a safe haven  

[romans holiday]

In my opinion, this error is common to both many gold bugs and anti-gold bugs [ridiculous term for a ridiculous position...and for want of a better one ].

The error consists of a false dichotomy; something has to be either a commodity or money. This is analysis gone mad.  Know I could understand that something has to be either money or not money, but there is no logic that says something can not be both a commodity and money.  

Think about it... all money is in a sense a commodity; a commodity is anything for which there is demand. Hmmm... which means fiat may neither be money nor a commodity in the future.

[wrongmove]

Show him the graph Steve! You know... the graph you just made! Nice and simple for numbskull numpties such as these.   

As one of the numbskull numpties who is skeptical (but respectful) of your views, what does that chart prove?

It seems to show that gold was used as money for a while (like horses were used for transport for a while) but it ended with defaults! i.e. it failed in what was meant to be one of its main aims.

Should I be piling into horses too?

With regard to the response that Steve posted, I too am worried by the fervour with which some, all of whom have a direct vested interest, push gold. And the kingpin argument is "gold is money" therefore to calculate the true value of gold, you simply divide the amount of cash by the amount of gold in the world.

It has many parallels to BTL "new paradigm" etc, but far more so. You have to questions these peoples' true motives IMHO, just like we questioned the Phil and Kirstys of the property world.

[romans holiday]

It seems to show that gold was used as money for a while (like horses were used for transport for a while) but it ended with defaults! i.e. it failed in what was meant to be one of its main aims.

for a while??    .  Take another look at that graph.  For all of recorded history, bar the past forty odd years, is more like it!!

Who knows, maybe we will also revert back to horses one day with the end of cheap oil  . Do you have a farm and stables? Then, sure, pile in!

Maybe at bottom we have differing visions of the world.  Some see history in the inevitable progress of the species, others see history as cyclical, with periods of progress followed on by periods of decline.  And these fundamental visions in turn colour the way in which we view many issues.

[Dispassion]

What would you say to this ?

Cant you see that many many commodities have been used as currency over time? Land, food even water. Gold is not different, it is simply a tangible good which has the ability to be bartered. That doesnt make it money, that makes it .... a commodity!
This false differentiation is being pushed by people with a severe agenda to make a lot of money form gold over the next couple of years. I know this first hand and it makes me quite worried for people who see gold as something it simply is not. Same as people made assumptions over property... that were a bit.... naive.

Damn, did this guy delete his account? It's always good to have a diversity of opinion and he has a very valid perspective.

The way I see it, gold has historically performed well at times of high inflation and at times of deflation for no other reason than people tend to believe that it will, any assertions beyond this are, as he says, naive. Gold is, by definition, a commodity and it's price is well correlated with other commodities, but it also shares some of the properties of currencies and at times of economic uncertainty is well correlated, with currency markets.

[bigtbigt]

"Is gold a commodity...?"

My view is that it depends upon how you define a commodity

I consider a commodity to be something that you produce in large amounts and use it in a way the destroys it or makes it no longer available. Given the growth in Asia in the last decade, the supply/demand equation has kicked in pushing commodity prices through the roof. So extremely high current prices provide one indication for whather or not something is a commodity.

By that definition, gold is NOT really a commodity ...we don't use it up, and its price has not rocketod like oil, wheat, industrial metals etc

So is gold money instead. Well not really, as although it can and has been used that way, its currently not.

Perhaps its because gold is not a typical commodity nor money, we find ourselves arguing about which it is. Why can't we just accept that it is something other than a commodity or money - simply an asset called gold, that is rare, stable, beautiful, and valued. Since it is a desired asset, then as monetary debasement/inflation occurs it will increase in value, and in times of crisis/insecurity people will turn to it because its proven to be valuable for eons.

Will it again become money - I doubt it. The powers that be will never let it so completely undermine their fiat, but instead they'll create some form of electronic fiat scaled to a nations asset base ...this is a computer age remember, and that experiment is yet to be tried whole heartedly.

[romans holiday]

Damn, did this guy delete his account? It's always good to have a diversity of opinion and he has a very valid perspective.

The way I see it, gold has historically performed well at times of high inflation and at times of deflation for no other reason than people tend to believe that it will, any assertions beyond this are, as he says, naive.

Monetary metals perform well in times of crisis because there is often no where else to turn in order to preserve capital/wealth.  They are safe havens. Economic reality is the driving force, not peoples wishes. To think otherwise is naive.

Keep in mind this particular thread is a space for gold bugs banter, so you will get a very strong opinion here.

[Dispassion]

"Is gold a commodity...?"

My view is that it depends upon how you define a commodity

I consider a commodity to be something that you produce in large amounts and use it in a way the destroys it or makes it no longer available. Given the growth in Asia in the last decade, the supply/demand equation has kicked in pushing commodity prices through the roof. So extremely high current prices provide one indication for whather or not something is a commodity.

By that definition, gold is NOT really a commodity ...we don't use it up, and its price has not rocketod like oil, wheat, industrial metals etc

So is gold money instead. Well not really, as although it can and has been used that way, its currently not.

Perhaps its because gold is not a typical commodity nor money, we find ourselves arguing about which it is. Why can't we just accept that it is something other than a commodity or money - simply an asset called gold, that is rare, stable, beautiful, and valued. Since it is a desired asset, then as monetary debasement/inflation occurs it will increase in value, and in times of crisis/insecurity people will turn to it because its proven to be valuable for eons.

Will it again become money - I doubt it. The powers that be will never let it so completely undermine their fiat, but instead they'll create some form of electronic fiat scaled to a nations asset base ...this is a computer age remember, and that experiment is yet to be tried whole heartedly.

Of course we can redefine words to make any statement valid.

Wikipedia says this:
A commodity is anything for which there is demand, but which is supplied without qualitative differentiation across a market.
http://en.wikipedia.org/wiki/Commodity

Dictionary.co.uk says this:
Noun - That which affords convenience, advantage, or profit, especially in commerce, including everything movable that is bought and sold (except animals), -- goods, wares, merchandise, produce of land and manufactures, etc.


Although a lot of gold is stored, some of it used for dentistry as a catalyst and jewellery. Yes this can be recyceld, at a cost, but so can many other commodities.

[romans holiday]

"Is gold a commodity...?"

My view is that it depends upon how you define a commodity

I consider a commodity to be something that you produce in large amounts and use it in a way the destroys it or makes it no longer available. Given the growth in Asia in the last decade, the supply/demand equation has kicked in pushing commodity prices through the roof. So extremely high current prices provide one indication for whather or not something is a commodity.

By that definition, gold is NOT really a commodity ...we don't use it up, and its price has not rocketod like oil, wheat, industrial metals etc

So is gold money instead. Well not really, as although it can and has been used that way, its currently not.

Perhaps its because gold is not a typical commodity nor money, we find ourselves arguing about which it is. Why can't we just accept that it is something other than a commodity or money - simply an asset called gold, that is rare, stable, beautiful, and valued. Since it is a desired asset, then as monetary debasement/inflation occurs it will increase in value, and in times of crisis/insecurity people will turn to it because its proven to be valuable for eons.

Will it again become money - I doubt it. The powers that be will never let it so completely undermine their fiat, but instead they'll create some form of electronic fiat scaled to a nations asset base ...this is a computer age remember, and that experiment is yet to be tried whole heartedly.

Hi bigbigt..... Thats a novel approach! Dissolving the dichotomy the other way.

[Dispassion]

Monetary metals perform well in times of crisis because there is often no where else to turn in order to preserve capital/wealth.  They are safe havens. Economic reality is the driving force, not peoples wishes. To think otherwise is naive.

Keep in mind this particular thread is a space for gold bugs banter, so you will get a very strong opinion here.

We're arguing the same point. However, if people didn't believe that gold was a preserve of wealth then it would cease to be.

Don't get me wrong, I'm very positive about the prospects for the gold price, but as you point out the average opinion in this thread has a strong bias, I'm just trying to add some balance.

[romans holiday]

We're arguing the same point. However, if people didn't believe that gold was a preserve of wealth then it would cease to be.

Don't get me wrong, I'm very positive about the prospects for the gold price, but as you point out the average opinion in this thread has a strong bias, I'm just trying to add some balance.

It is a truism to say the value of gold resides in the fact that people value it [believe in it].  What is further to the point is that economic reality [laws in the real world] are what drives these values. These laws are best arrived at through observation of history and experience rather than abstract reason.  Hence, the significance of Steve's chart.

Perhaps it would be better to start another thread to deal with this subject matter.

[Dispassion]

It is a truism to say the value of gold resides in the fact that people value it [believe in it].  What is further to this point is that economic reality [laws in the real world] are what drives these values. These laws are best arrived at through observation of history and experience rather than abstract reason.  Hence, the significance of Steve's chart.

Perhaps it would be better to start another thread to deal with this subject matter.

I agree, I think a pinned thread on the fundamentals of the gold market would clean this thread from what I'd prefer to see: an objective discussion on the direction of the gold price and it's related markets.

[romans holiday]

I agree, I think a pinned thread on the fundamentals of the gold market would clean this thread from what I'd prefer to see: an objective discussion on the direction of the gold price and it's related markets.

How would "the fundamentals of the gold market" differ from "an objective discussion on the direction of the gold price and it's related markets"?

Unless you mean just "the fundamentals of gold".