Gold is money, gold is not money, blah blah blah... the arguments in financial journals bore me to death.
One fact that is inescapable: Gold represents the real work necessary to produce it. I've written about this before.
Gold has been mined and refined continuously for nearly 6000 years, yet all the above-ground Gold in existence would barely fill 3 Olympic sized swimming pools. That's an awful lot of labor for very little end product, dontcha think? Consider this compared to how many swimming pools worth of oil have been extracted, refined, and wasted playing in dune buggies on Southern California sand dunes in just the past ten years.
Originally, gold was sought after by bronze age metal crafters due to it's density and softness- while it was too soft to forge weapons, it was easy to shape, and its yellow color added pretty decoration to shields, sword guards/pommels, and helmets. Because of gold's scarcity and the fact that it was more easily aquired via the theft/death of it's previous owner then it was by mining and refining it, Gold usually ended up adorning implements of the strongest and most powerful warriors, and the more Gold a man displayed on his wares, the more powerful and noteworthy his personal prestige and social status became- Any man who dared to parade around accesorized by Gold was simultaneously demonstrating that he had the skills/means to aquire it, as well as the skills necessary to defend it. Gold was a glaring symbol for all to see that the wearer was not to be messed with...
In other words, Gold moved rapidly from a utilitarian metal to a symbol of perceived wealth and power.
It is only natural that gold would begin to demonstrate its utility as money next. Eventually, the tough guys had so much gold that they and their women could not possibly wear it all (it is quite heavy after all), and there were plenty of people who would gladly trade work, or oxen, or wheat for a few scraps of gold.
(That this sentiment would give rise to the erroneous concept of social class structure, the emergence of Kings, and the common "haves versus have-nots" social dynamic is duly noted; but that is another essay for another day. Today we are focusing on value.)
So, the genesis of gold as the longest lasting, most enduring symbol of money in human history, was anchored by:
1) Its durability and permanence- gold does not react, oxidize(rust) or dissolve as easily as other elements.
2) Its scarcity- gold could only be aquired via work- whether that work was noble and scrupulous:
- Digging, sifting, and refining it, or
- Growing wheat, or cattle to trade for it, or
- Trading your skills as a craftsman in exchange for it.
- Murdering, robbing, and plundering
- Cheating in games of chance where gold was the wager
4) Its portability- Cattle have enormous value for the amount of food calories they provide, but they are not easily transported from town to town (and they are nearly impossible to hide- the cattle farmer has no choice but to display his wealth in full view of every cattle rustler in the area)
So, I've been typing for 20 minutes and all I have covered is a brief history lesson. So, on to my epiphany:
Go back up and read number 2 again, and if you haven't already, bo back and read the other post I linked to above.... Now, start thinking about the present day.
Gold (any valid money, actually) is a stored-value proxy for work. When workers/laborers are in scarce supply (low unemployment levels), the proxy value of "money for work" falls. When there is more work to be done than there are workers available to do it, then people willingly trade the value of their work for less real monetary value, and they also save less in both a monetary sense, and in a value sense:
"Since there will still be plenty of work for me tomorrow, why should I worry about earning any more today than I need for today?"
- In other words, during low unemployment periods, the psychological value of money and work typically fall together.
During inverse periods, when there is less work to be done, and there is a preponderance of available labor to do it (aka high unemployment), the value of work (for those who do not have it) soars, as does the value of money (since the future is less stable, people save more, and they look for storage methods that will preserve as much of the original value of their labor as possible for as long into the future as possible)
So, that's my epiphany- the real value of labor, and the real value of money are not inverse to each other, as common sense would suggest. At a very macro, societal level, and over very long timelines, these values rise and fall together as economic employment opportunities concurrently rise and fall.
Employment will always be more IMPORTANT than money- easily demonstrated by the fact that if you ask an unemployed person whether they would prefer to have a job, or a free unemployment check, any rational minded person would choose the job. (The fable that if you give a man a fish you feed them for a day, while if you teach a man to fish you feed him for life, is apt), but the importance or priority of a job over money does not change the direction of the psychological value curve related to each, it only changes the ratio by which they exchange for one-another.
Back to today. For the past 40 years, money has only been printed paper, and over the past 20 years, money has evoloved into nothing but data. Well, paper is easily grown, and data is VERY easily conjured into existence, but up until recently, employment has been readily available, so people have been happy to trade their work output for these low-value intruments of exchange (The future's so bright, I gotta wear shades). Things were orderly, stable, and everything balanced out nearly perfectly. Even the global anchor of all this "wealth", oil, seemed to be pouring out of the ground easily enough to keep people from worrying about where their next meal would come from, or where the next tank of gas would come from, or how much long term purchasing value their monetary savings was maintaining.
And then the roof caved in in 2002, and the money printers rushed in and threw up a bunch of monetary scaffolds and temporary supports and the party resumed... and then the roof caved in again in 2008, and the money printers rushed in again and threw up even MORE paper and digital monetary support under the system; and here we are today, where the common faith among many is that the system is gearing up for yet another epic fail...
Well, by the early 2000's, everyone endeared to the "oil is wealth and paper is money" concept was getting rich by shuffling paper, and buying bigger houses, and partying. The system seemed perfectly balanced and perpetual, but anyone (the few) who understood the immutable laws of physics was getting REALLY nervous...
The second law of thermodynamics states that entropy (the relationship of order to chaos in any system) must always INCREASE (favor chaos) over time. This is to say that all orderly systems must fail, and all well formed structures must disintegrate into less stable states- this is unavoidable, and the more orderly the system is, the higher the probability that it will succomb to the laws of entropy. This concept is easy to see in old buildings that collapse and disintegrate into dust over time, and in fruit that gradually rots into soil, and in beautiful sand castles that degenerate into disordered mounds of sand grains. Even paper disintegrates into dust over time.
Are we seeing the same thing in the global economic/monetary system? Is the global fiat money system succombing to the forces of entropy? History tells us that every paper money system ever tried, has failed, and that all measures of social status and wealth (houses, cars, rolexes, etc) degrade and succomb to the forces of entropy over time.
Now, please go back up and read number 1 above. There is only ONE class of monetary instrument that denies the law of entropy from doing it's nefarious deed: High density precious metals. (I concede that this point is refutable when applied to cosmically huge timescales, for even gold will slowly degrade into Platinum as the Universe continues cooling, but we're talking Trillions of Trillions of Trillions of centuries for that to happen, and I freely admit that I am not so concerned with preserving the purchasing power of my labor for quite THAT long :-)
Iron rusts. Pure Sodium actually "burns" in the prescence of air. Even the highest quality stainless steel degrades to powder when left in the ocean for a few years, but pieces of gold and silver can sit at the bottom of the ocean for THOUSANDS of decades, and will come back up still preserving their original weight, shape, and composition.
Ok, enough on entropy and the permanence of wealth. Back to the present times.
So, we are now firmly entrenched in a period in which employment (the availability of jobs) is low, so the psychological value of work is high and rising, and therefore the psychological value of money should also be rising, and yet the paper money system in place is showing structural cracks in the foundation...
So, how will this all play out? I think the answer lies in Africa.
Wait, AFRICA? What in the hell are you talking about, Robert?
In the global economic boom of the past 60 years, Africa has clearly been the loser. Even with a growing population that demonstrated that it valued work very highly, prosperity just never took hold on the original human continent; and now we are at a point in time where the global economy is contracting, and the perceived value of work and money (to those who have neither) is rising world-wide. This has very interesting (if not sad) repercussions for Africa.... unless some method of increasing the wealth of the African continent can be found that will employ the abundance of African labor, and leverage it to produce items that are rapidly increasing in psychological value world-wide. But, we've all seen the pictures of Africa... there's nothing there but Kilimonjaro and dirt.
Do you see where I'm heading with this? What forms of wealth arise by working the land?
Oil, corn, wheat, cattle, gems... and metals.
Suddenly, everything I've read in Adam Smith's The Wealth of Nations makes even more sense to me than before (as do many of the works of Murray Rothbard and Ludwig von Mises), and even though I signed off long ago on Mises' premise that money is a proxy for the stored value of work, I never fully realized that these values, from a global psychological perspective, must rise and fall in unison like a long, wide amplitude sine wave, based on the general employment level.
Unemployment raises the perceived value of work, and it increases the personal need (demand) for more valuable forms of money.
All these arguments about "Gold is a hedge against inflation" versus "gold pays no income so it is financially worthless" are completely capricious and irrelevant.
Gold is permanent. Low unemployment levels are not; and faith based paper money systems are not, because entropy must de-construct faith just as readily as it de-constructs sand-castles.
The law of entropy can not be reversed- sand can not be "un-weathered" back into granite, and nature does not randomly create sand castles by combining wind, water, and sand (although there is no physical law that says this is impossible- it is only very VERY unlikely).
Only new, temporary orders can arise out of chaos, and these new orders are all doomed to submit back to chaos just as every temporary order prior to them did.
Likewise, only monies that maintain scarcity, and possess the durability to survive the periods of economic chaos can move into the next period of temporary economic order.
Now, I've always considered myself to be pretty sharp, but last night at about 8:30pm as I drove home with a tasty load of Mexican take out, I suddenly felt much smarter and more enlightened than I had been at 8:29 as the intellectual and subjective link between the value of money and the value of employment wired themselves together in my brain...
So that is the most complete rationale I can provide for why your real physical savings must not be deposited into paper or digital intruments if you want them to maintain trade/purchasing value that can only rise and fall based on the concurrent rise and fall of the real value of labor over time...