Remember that we said before in What should be your fundamental reason for accumulating gold?,
If you cannot remember anything else, please remember this: gold is a hedge against loss of confidence in fiat paper currencies.
In other words, gold is the inconvenient torn in the flesh for fiat paper currencies. It has, for centuries (or even millenniums) being chosen by the free market to function as money in most societies (see A brief history of money and its breakdown- Part 1). It was only until recently (in 1971) that the last official monetary role of gold was abolished (see A brief history of money and its breakdown- Part 2). But given the extended historical role of gold, do you think a mere 3½ decades of government decree can really completely erase the perception of its monetary value from the consciousness of humanity? We doubt so. Many ancient governments had tried but none succeeded (see Ancient Chinese fiat paper money).
Therefore, conventional supply and demand analysis cannot be applied for gold because it is not a commodity (see Is gold a commodity?). This is because with its extremely limited industrial use, gold will not be worth that much at all. It is worth so much because its value is largely derived from outside the realm of industrial and pragmatic usage (i.e. monetary value). Similarly, how much industrial and practical value is a piece of crisp US dollar? If there is no pragmatic use for a piece of paper called the US dollar, then why is it in so much demand (e.g. drug dealers use them for transactions)? Therefore, in conventional supply and demand analysis jargon, the monetary value of gold is consigned into a conveniently labelled group called “investment demand.” But in reality, since gold is a boring, inert metal that does not have much pragmatic use and does not pay dividends, income or interests, it is completely unfit for ‘investment.’ Therefore, it has ‘demand’ the same way the US dollar has ‘demand.’
Next, armed with this understanding, we will then talk about gold’s sister, silver, in the next article.
Tags: fiat currency, Gold, money, US dollar
