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People talk about the bull market in gold being over. Can something that never began and never was, actually end? That is not a philosophical question meant to deceive. The question is critical to understanding gold and its valuation. [Let me explain.] Words: 595
So writes “Monty Pelerin” (www.economicnoise.com) in edited excerpts from his original article* entitled Gold Is Not In A Bull Market.
This article is presented compliments of www.munKNEE.com (Your Key to Making Money!) and may have been edited ([ ]), abridged (…) and/or reformatted (some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. Please note that this paragraph must be included in any article re-posting to avoid copyright infringement.
Pelerin goes on to say in further edited excerpts:
The Nature of Gold
There is no bull market in gold! There never has been and never will be. It is an inert element, which reasonably describes its value. Just as its atomic number is fixed (number 79), so pretty much is its value. That is, gold is stable in value, at least in terms of other real goods. The claim that an ounce of gold bought a fine suit one hundred years ago and that same ounce buys the equivalent of a fine suit today provides an anecdotal example of what is meant by it’s value stability.
Those who discuss gold in terms of bull or bear markets do not understand reality and do a disservice to less informed readers. Gold is money, true money, as opposed to fiat currencies. True and honest money cannot be in a bull or bear market. Its value is stable (but not constant!). Demand for true money changes and influences value at the margin. People demand more or less to accommodate their expectations and changing circumstances. The demand effect is generally small in terms of its influence on value.
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The supply of gold is generally considered fixed. It is a non-factor in value determination (unless there is some technological breakthrough that produces an 1840s type “gold rush” event). If supply is constant and demand is relatively stable, then the value of gold will be stable.
Why Gold Is NOT In A Bull Market
The price of gold has risen from the low $200 per ounce range to about $1,600 per ounce in a little over a decade. How is that not a bull market? Well, price and value are not the same, especially in a fiat currency world. Price is always two-dimensional. When we say the price of something goes up, we are referencing two different items. In most cases we are comparing the price of a good as relative to fiat currency. When the price changes, we know that it changed in terms of whatever we are using as the numeraire – but we don’t know whether that change is due to changes in the good itself, changes in the value of the numeraire or both.
The fine suit anecdote illustrates this point simply. If a hundred years ago a fine suit cost an ounce of gold and today a fine suit costs an ounce of gold, the price of gold has not changed, at least as expressed in terms of a new suit but both changed dramatically in terms of fiat currency.
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The price of gold and the price of the fine suit rose dramatically. A hundred years ago the suit cost about $20. Today it costs around $1500 – $1600. Neither the price or value of gold or the suit has changed in relation to one another. Both prices however have soared in terms of the fiat currency used as a numeraire. In terms of a fine suit, gold has been stagnant. In terms of gold, so too has the fine suit.
Rather than claim that gold (or suits) are in bull markets, wouldn’t it be more appropriate to say that fiat currencies are in a bear market?
Editor’s Note: The author’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor.
*http://www.economicnoise.com/2013/03/17/gold-is-not-in-a-bull-market/
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Interesting article and I completely agree with the concept that PM is “just” PM but flat currency is the one that fluctuates depending upon the publics perception of its value.
BTW: As far as the supply of GOLD being “FIXED”, I know that seawater contain a massive amount of GOLD and that the Koch Brothers own companies that make filtering membranes, so as GOLD increases in value I expect to see more GOLD being “discovered”, which is yet another reason I like Silver more than GOLD…