 What Most People Don't Know About Gold
By Doug Casey
Chairman, Casey Research, LLC.
The
International Speculator
November 24, 2005
[Ed. Note. In the following
article, legendary speculator Doug Casey steps back for an important
historical perspective on gold. You can learn more about Doug's
renowned International Speculator newsletter - which each
month focuses on providing unbiased recommendations on the world's
most profitable junior gold, silver and metals exploration and
development companies - by clicking
here.]
Historically, gold has never
been viewed as a speculation. It was simply money: cash in the
most basic form. It was a medium of exchange and a store of value.
People did not accumulate gold because it could make them wealthy,
but because it was a convenient, liquid way to keep the wealth
they had.
It's only very recently, since
1971 - when the U.S. government proved unable to keep the price
at $35 - that gold has been viewed as a speculation. In those
days gold was an ideal speculation, with minimal risk but a huge
upside.
Gold has been in a free market
for three decades now; the frenzy of the '70s that took the metal
from $35 to more than $800 disappeared, and was followed by a
21-year bear market. As a result, an entire generation of investors
has grown up thinking that gold is not only not money but an
investment dog. Their thinking is about to change. I believe
that not only will gold again be used as money, but that it has
entered a new long-term bull market.
Before looking at where the
metal's price is likely to go over the next few years, however,
it's worthwhile to consider some of the fundamentals... fundamentals
that not 1 in a 1,000 people understands.
The Questions. Any discussion of gold always comes
back to certain basic questions: Why is gold money? Why is gold
valuable? Why can't money be whatever we say it is? (The last
question is usually asked by government officials because they
don't know the answers to the first two.) Why does gold give
rise to all kinds of controversy not associated with, say, platinum
or lead? Why is the stuff an emotional, political statement for
those who love it and for those who hate it?
The Answers. Over thousands of years, in billions
of transactions by millions of humans, many commodities have
been used as money: stones, salt, cattle, and seashells among
them. But wherever gold was available, it tended to displace
other media of exchange. Like any successful money, gold never
needed to be decreed "legal tender" by a government;
it was recognized as the most desirable money by common consent
because of its unique properties.
Certain materials have proven
especially well suited for certain uses. Aluminum is good for
airplanes, bricks for construction, paper for books, and gold
for money. If bricks were used for airplanes and aluminum for
books, the results would be as suboptimal as when paper is used
for money.
In fact, the properties required
of money were first described by Aristotle in the fourth century
BCE.
1. It is durable.
It won't evaporate, mildew, rust, crumble, break, or rot. Gold,
more than any other solid element, is chemically inert. This
is why foodstuffs, oil or artwork can't be used as money.
2. It is divisible.
One ounce of gold - whether bullion, coin, or dust - is worth
exactly 1/100th of one hundred ounces. When a diamond is split,
its value may be destroyed. You can't make change for a piece
of land.
3. It is convenient.
Gold allows its owner physically to carry the wealth of a lifetime
with him. Real estate stays where it is. An equivalent value
of copper, lead, zinc, silver, and most other metals would be
too heavy.
4. It is consistent.
Only one grade exists for 24-carat gold, so there is no danger
of owning 24-carat gold varying in quality. Twenty-four-carat
gold (pure gold) is the same in every time and place since gold
is a natural element, unlike gems, artwork, land, grain, or other
commodities.
5. It has intrinsic value.
Gold finds new industrial uses each year. Of all the metals,
it is the most malleable (able to be hammered into sheets less
than 5-millionths of an inch thick), most ductile (a single ounce
can be drawn into a wire 35 miles long), and the least reactive
(it can stand indefinite immersion in seawater, does not tarnish
in air, and can withstand almost any acid). Next to silver, it's
the most conductive of heat and electricity and the most reflective
of light.
These superlatives make gold
uniquely well suited as a medium of exchange and a store of value.
Arguments that gold's value is "mystical" are silly;
it is simply one of the 92 natural elements.
One important last point was
not listed by Aristotle, probably only because he lived before
the creation of paper and banking.
6. Gold cannot be created
by government. Gold can, of course, be debased with impurities
or falsified in weight, and governments strapped for revenue
have tried those tricks. But a trader can protect himself with
a pair of scales or a vial of acid, although a familiar and trustworthy
hallmark of a coin saves him that trouble. Unlike currency, gold
cannot lose value because of government mismanagement. On the
contrary, it tends to gain value because of government mismanagement.
But isn't that latter point
largely academic, since gold isn't presently used as money anywhere
in the world? I think not. Even though the concept still receives
little discussion, and none in "official" circles,
gold is likely in the foreseeable future to reassume its traditional
role as money worldwide. (And not just in bullion form, but in
modern, safe and reliable bullion proxies and electronic transaction
services such as those offered by goldmoney.com.)
I have no doubt that gold will
again regain its traditional role of money, but only after it
is trading at far higher prices than it is today. Wait and see.
Until then, there is nothing
wrong with viewing gold as a speculation... which is doubly true
of the gold shares we follow in our International
Speculator newsletter. That's because every $1.00 increase
in the bullion price of gold translates into an exponential increase
in the value of a mining company's profits, or an exploration
company's blue sky potential.
-Doug Casey
Doug Casey, legendary natural
resource speculator and author of "Crisis Investing",
one of the best-selling investment books of all times, has helped
tens of thousands of investors become a great deal richer. His
monthly newsletter, the International
Speculator, which is now in its 26th year, recommends almost
solely companies that can be expected to generate a double- or
triple-digit return within a year. You can view all of Doug's
current best picks without risk or obligation. Learn
more
November 23 2005
The International Speculator
321gold Inc
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