WHAT´S GOLD REALLY WORTH ? CENTRAL BANKS SURE DON´T WANT YOU TO FIND OUT / GATA ( HIGHLY RECOMMENDED READING )

What's gold really worth? Central banks sure don't want you to find out

by cpowell

 

Thu, 2011-05-05 04:05. 

Dear Friend of GATA and Gold:

MarketWatch and Wall Street Journal columnist Brett Arends lately has eased off his disparagement of gold, and with his commentary at MarketWatch yesterday he joined those who have been asking how there can be a bubble in gold when there's no retail public buying of it.

But Arends predicts that gold will become a bubble, which may be less than fully satisfying to those whose aspirations for the metal are a bit higher than the next big trade -- whose aspirations for gold involve its becoming an independent currency trading freely, unmanipulated by central bank intervention.

Arends plainly has no use for that sort of thinking. He writes:

"... There are problems with gold that make it very hard to buy with confidence. Gold is volatile. Nobody knows what it's worth. I keep asking gold bugs for a sensible valuation, and they can't tell me. And you can forget all the superstition. Despite what the true believers say, gold is no more 'true' money or 'real' money than anything else. As it generates no income, the gold market is effectively a Ponzi scheme. Your returns come entirely from the next buyer in line."

These criticisms are easily answered.

Insofar as gold is increasingly a currency again, its volatility is largely a function of the volatility of other currencies, as well as a function of central bank intervention, open and surreptitious.


As for gold's worth, Arends certainly would be right to argue that it's relative. But what financial assets have valuations that are not relative?

To calculate a value for gold, at least one can start with its cost of production, which can be estimated fairly reliably by experts in mining and mine finance, or at least estimated as an average of current production costs. Arends acknowledges that "gold may simply be a less awful currency than all the others." Thus its value also can be calculated from the currency markets. And then, of course, if one wants to go there, one can speculate on the value imparted to gold by all the central bank scheming to suppress its price and conceal its true value, scheming that includes the conjuring of vast supplies of imaginary gold. What gold would -- will -- be worth when that conjuring is exposed and the imaginary supplies go "poof" may be for the moment only the fondest dream of gold bugs, but there is also a sensational news story in it for any journalist willing to pursue it.

In any case it's unfair to criticize gold for any mystery as to its valuation. Your secretary/treasurer long has complained that "since central bank intervention in the currency, bond, equities, and commodity markets has exploded over the last few years, we don't really know what the market price of anything is anymore," central banking having profoundly interfered with most markets. (See http://www.gata.org/node/9545.)

If, as Arends writes, "gold is no more 'true' money or 'real' money than anything else," with its libertarian instincts GATA would concede everyone's right to try to use whatever he wanted as money. But in turn maybe Arends would concede that gold does have quite a history in this regard -- a history far longer than the history that can be claimed by any other current circulating medium of exchange. While, as Arends' vain search for the gold bubble suggests, typical North Americans may not even be able to spell g-o-l-d, their ignorance hardly repudiates the views and practices of, say, a couple billion Asians.

And Arends is simply unfair in complaining that gold "generates no income" and that "the gold market is effectively a Ponzi scheme" since "your returns come entirely from the next buyer in line."

Currencies pay interest in part because of their inherent risk of depreciation and counterparty risk, the risk of outright loss. Since gold in possession has no counterparty risk, gold is less obliged to pay interest -- but it can and does pay interest when, like currency, it is loaned out. And how is gold any more a Ponzi scheme than the dollar, the euro, or any other financial asset, whose returns also depend on "the next buyer in line"?

Political news coverage usually degenerates into reporting of the horse race, diminishing what candidates say and stand for. It is often the same with financial news coverage, where reporting about gold is disproportionately a matter of its comparative returns, like the bubble question in Arends' commentary. There is so much more to gold than that. Yes, the substance is horribly obscured by central bank secrecy and deception. But piercing that secrecy and deception would be a great service by journalism, and much of the work has already been done by GATA here:
http://www.gata.org/taxonomy/term/21