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It's Not Your Daddy's Gold Anymore Why the reasons for holding gold today are different from 30 years ago by Lawrence Parks As recently as 30 years ago, some people bought and held gold not because they thought it was a "store of value," a concept that is intellectually defective and empirically indefensible, but because they had historical memory that gold is money. Today, as the older generation passes on, the new generation is tragically getting rid of inherited gold just as the reasons to hold it are becoming more imperative. First, a little perspective: Gold became money because direct barter was too inefficient; the transaction costs were too high. To make trade more efficient, and to make possible a division of labor, men choose a common commodity to trade with. That commodity has been many things including salt, cattle, wampum, tobacco, whiskey, and, of course, gold and silver. Eventually, the market, not some government potentate, chose gold because it is the most efficient medium of exchange for transmitting value over space and time. Later, governments usurped the role of coining gold. Not only did they benefit from seignorage, there was also a public benefit. Since government guaranteed the content of gold coins, commerce could be conducted based on count, rather than constantly re-weighing the gold. Yet another innovation was to trade receipts for gold instead of gold itself. This happened only because people had confidence that the receipts could be redeemed on demand. During the golden era of the British Empire, there were several war emergencies when redeemability was suspended. However, it was always understood, and indeed it was true, that after the emergency, redeemability would be resumed. That was the case for several hundred years until Britain finally abandoned gold convertibility for good in 1931. Americans who understood gold's role as money were aghast when Franklin Roosevelt seized our nation's gold in 1933, and they fully expected a return to gold-as-money when people came to their senses. Clearly, that has not yet happened. Indeed, all around the world,in Mexico, South Korea, Malaysia, the Philippines, Russia and elsewhereÑpaper-ticket fiat monies are collapsing. While Europe is well on its way to adopting a single currency, the Euro, and there are mutterings about a single Asian currency, there is not yet a call for gold. In contrast with the older generation who understood the role of gold, the reasons some folks hold gold today are almost all fallacious. They include mistaken notions such as: (1) gold is a hedge against inflation. (This has not been true for the last eighteen years.); (2) gold is a proven asset. (In fact, for the last eighteen years, the opportunity cost of investing in gold has been staggering!); (3) gold is a good diversifier since it is inversely correlated with the equity market. (Flushing money down the toilet as the S&P goes up is also inversely correlated with the equity market, but who would do that?); (4) gold is cheap compared to its history. (This says nothing about why it is cheap. It is cheap because there is just too much of it for the purposes for which it is being used.); and, (5) there is a shortage of gold production compared to that used in jewelry fabrication. (But this is meaningless because there is more than a fifty-year supply above ground. No other commodityÑexcept silver, which has also played a monetary role has even a one-year supply above ground.) There's more to this, but you get the point. Since these perceptions are wrong and people are recognizing that they are wrong, as the older generation passes, inheritors are getting rid of their gold. Gold will have its day when the fiat dollar collapses and people once again demand gold-as-money. Then, and only then, will there be a reasonÑto guarantee future paymentÑto save and store gold. The payback to people who have the foresight to have held gold will be astonishing. Dr. Lawrence Parks is Executive Director of FAME, the Foundation for the Advancement of Monetary Education, and a member of Workers' Education Local 189, CWA, AFL-CIO. E-mail: Lparks@fame.org; Internet: Fame   BACK