Warren Buffet recently wondered publicly at the uselessness of gold, all of which ever mined, he noted, would fit into a cube 67ft to the side. $7 trillion worth he said, which could buy seven Exxon-Mobils and half the worlds' arable land and still have $1 trillion walking around money in your pocket or somesuch. He does concede it is nice and shiny and he could use the cube as a mirror.------
When we create something which others find to be of value to them, we often enter into an exchange of this good or service for other goods or services of value to us (self-sufficiency can be fairly austere), and as a result we find that we can all better specialize in our individual efforts, thereby increasing our productivity, efficiency and level of technology. Utilizing a medium of exchange rather than engaging in direct barter further increases these benefits manyfold.
The medium of exchange is indispensable to both human society and its continuing evolution, at least as we currently understand it. The exchange of value it facilitates brings its users together in such a way as to render the whole greater than the sum of its parts.
Everyone using this system of value exchange is likely to be wanting to accrue a surplus of value once they have acquired the goods and services they want from this flow, rather than run a deficit, no? They are aiming to have, overall, larger income than expenses, allowing the buildup of a stock of value, commonly referred to as wealth.
Some of this surplus will be redeployed into capital assets to fuel further productive growth and enhance the operating margins.
Some of this value will be saved.
So we have value, created by people (yes, some of it is arguably dug out of the ground or similar, but it must still be mined/harvested etc., in order to realize that which is otherwise only potential value), willingly exchanged between people, some of it consumed, some reinvested to create more value, and some saved.
The consumed and the reinvested values were exchanged using the medium of exchange, and in both cases the ultimate owner of these values took their payment in full in the form of an asset. The medium of exchange is simply a claim in the system, whereas the actual value, the utility the end user is after, is in the asset. The value to the asset’s ultimate owner lies in the utility the owner finds in the asset. Value is the measure of utility, subjectively assigned by each individual. The medium of exchange, in facilitating the acquirement of a useful asset, has instrumental value only. It is the means, not the ends.
What to do with the saved value?
It could be held in the medium of exchange if this medium held its buying power over time, if it could be exchanged at a later time for a comparable value with that which was initially relinquished, but this buying power is not maintained, as we know. Instead, today additional medium of exchange is created upon the signature of a borrower, as credit, by banks as a matter of course; with the Government Treasury Department's issuance of bonds; and by the Central Bank expanding its balance sheet to monetize debt, all in accord with the aim of constant monetary inflation, itself a matter of regulatory policy.
So the medium of exchange is constantly diluted, by the promise of value yet to be created. These promises of future value circulate at par with value that has already been created, in the form of the medium of exchange. All three of these methods of medium of exchange creation are based upon promises of value yet to be created.
Saving surplus value in the constantly diluted medium of exchange is a losing proposition for the saver. Value is constantly being drained from such savings, as many people are using a promise of value not yet created to acquire assets, to receive payment in full, concurrent with the ever expanding volume of the medium.
Gold historically served in the store of value function, which is why Buffet is even commenting upon it; it has been a fundamental part of the human monetary system for millennia. It served in this role as a simple physical asset, just like any other asset, but the only practical function of gold as an asset was as an excellent store of value. It rose in prominence in this role simply because it performed it better, for a long list of well documented reasons. Gold was the supreme physical wealth reserve, sheltering surplus value.
It stopped performing so well as a store of value once it was brought inside the monetary system. It was monetized.
Firstly, gold was deposited with a third party (banks, ultimately) for security and notes issued to the depositors, notes which eventually began to circulate as a medium of exchange. At this point, all the value is still intact and undiluted - a 100% reserve ratio. But this changed when gold lending began, and particularly when notes were lent in lieu of the physical metal, as there was now only a partial reserve: the quantity of gold (or at least notes that traded at par with gold, and were accepted to be “as good as gold”) had been inflated beyond the actual physical reserve. There are now more claims on value than there is value currently available. Promises priced at par with the real thing.
Secondly, in an effort to divert some of this surplus value into their own possession, the exchange rate of gold with paper currency issued by Government Treasuries was fixed by decree, giving value to said currency. The Gold Standard. A scam, utilizing the reputation of gold. Savers feel secure saving in gold-backed currency, and as such they exchange their surplus value for these notes, printed by the Treasury. The surplus value that once accrued in physical gold, now, by virtue of the fixing of the exchange rate with the currency, accrues instead to the currency. Gold has been monetized, brought inside the monetary system.
The supreme physical wealth reserve was neutered, firstly by the inflation of gold receipts higher than the actual physical reserve (unofficial monetization), and secondly by official monetization. Both are (relatively opaque) misappropriations of the value stored in it.
The banks where the savings denominated in currency are regularly held on deposit are the public’s gold exchange window, and the front for the Treasury. In the event of a run, the bank simply closes when insolvent, leaving remaining creditors with no value. Where has their value gone?
Of course over time the Gold Standard could not be maintained as it could not facilitate large-scale wars (WWI and WWII could not have been financed on the Gold Standard), and because its reach was not global; foreigners without a fixed exchange rate for gold found gold could be acquired from regions where it was fixed more cheaply than their local price, so gold gradually migrates to where it holds the most value.
The Gold Standard became the Gold Exchange Standard, with the physical gold window only open to foreign Central Banks, until finally that window too was closed to stem the flow before the stock was exhausted.
We are left with a system of unbacked fiat currencies, all floating against one another with no objective benchmark from which to ascertain their true value. This is no accident; it is the logical last stage of the surreptitious pilfering of value. Gold was this objective benchmark, historically, but in this fiat era gold has been encumbered with a plethora of derivatives, leaving no market value for physical gold. Physical gold is available instead at a massive discount: the “price” of gold in this fiat system is not found in a physical only market, but in one in which the physical is diluted with promises of future gold (all gold derivatives). The “price” is in fact a hybrid of physical and paper gold.
The value of the scarce physical metal is considerably higher than the value of the mass produced paper contracts which dilute the price but not the physical quantity.
And now we come back to the beginning, where the old becomes the new.
Buffet would feel quite differently about his theoretical cube of gold if physical and paper gold were not treated as interchangeable with regards to their value (how can they honestly be when there is a ratio of possibly 100:1 paper to physical?), and the physical were valued in a physical only market as a physical asset. The perfect vehicle for the saver’s surplus value. As demand for physical gold gold intensifies, this decoupling is inevitable.
The divisibility of that cube to absorb value is practically infinite. As value is stored in it, the exchange rate with currency rises, all else being equal. Gold is once again valuing not only the currencies, but by extension everything else too. It is the objective benchmark allowing us to ascertain the relative values of everything.
Central Banks and the very wealthy the world over hold reserves of physical gold in preparation for this inevitable change.
It is notable that Buffet valued that $7 trillion in todays assets. It is only the assets available for exchange with currency that give currency value. This is why gold was monetized at all; to eliminate it as the physical asset which openly and accurately valued currency, thereby terminating the ability to debase currency and divert a flow of value into the hands of those who expended no effort for it.
Of course when physical separates from paper gold, gold will then be accurately showing just how much value has been channelled away from savers paper savings, and where it now resides.
Freegold is unencumbered physical gold as the wealth reserve asset outside the monetary system. Gold will spontaneously reassume this function when physical separates from paper. A casual glance at the balance sheets of those Central Banks who mark-to-market their gold reserves reveals that this is not only expected, but it has been prepared for.
From this position outside the monetary system, as a simple physical asset, gold denominates everything inside the monetary system in terms of value, because accrued value is all that this asset is, accruing value is all it does. This is its function. The function of gold.
The ONLY function of gold.
Blondie
