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What Use is Gold Indeed!

Commodities / Gold & Silver Jun 18, 2007 - 11:55 AM GMT

By: Andre_D_F_Oosthuizen


What use is gold? Gerry Hiles raised the question, June 7, 2007. Good question indeed and all the points raised are true and thought provoking up to a point.

What follows is another interpretation of the utility of gold.

Mr. Hiles in fact answers all his questions by asking them but not following it through with the logical conclusions.

First I will quote Mr. Hiles, then follow with comments.

"All you can do is swap your gold back into some fiat currency ... if you meanwhile have not been robbed and killed."

History shows that always when the need arises that gold needs to be swapped for fiat currency there is someone willing to do the trade. One will never be "stuck" with gold.

"Or you might "own" some kind of certificate that you have a call on some gold in some vault or other, but that piece of paper is no better than fiat currency, because you really have no idea whether or not there is sufficient physical gold to cover your own and all others claims. (Back to the original banking system, in effect, and the original failure of the "gold standard", because all you really own is a piece of paper which "promises" to deliver what probably does not exist.)"

If you actually own gold, you may store it at your banking institution where you hold your accounts, in their vaults, at a negligible cost, same as with any other valuables and/or documents.

All the comments about scarcity confirm at least one economic law that most seem to agree upon. Scarcity increases the value of anything that has utility.

The only question that remains is whether gold does have utility. As with everything, it is a matter of perception. The following points are put forward for consideration.

It may be idiocy for mines all over the world to employ labor and capital to mine gold. However, they are doing it and thus we can conclude there is some demand for it. There is a direct correlation between the gold price and the cost of labor and capital. Mines will discontinue when costs rise above income. A strange phenomenon remains that fiat money credit is still being used in some cases to continue operations. Gold must obviously be good enough collateral for the banks. Why lend to mines while discrediting gold as a barbarous relic?

It is believed that as much as 80% of gold is held in private hands and thus even if the gold price may or may not be manipulated on the surface, it can not be cornered like strategic products such as oil and uranium by governments and corporations. There is an argument that gold can be confiscated again as was the case in America in the past, but that is a problem for if and when that may occur.

The so-called flow ratio of newly mined gold to existing above ground supply allows for less volatility and also prevents serious disruption to the availability of gold should all mining be halted for any reason.

The greatest utility of gold probably lies in the fact that it acts as a barometer (policeman or guard) over the activities of regimes and central banks.

Due to the fact that technological advances in production are made as fast in mining as in any other field of endeavor, one can then immediately see how the cost of capital is being manipulated by the central bank system. The more the cost of labor and the cost of capital become unbalanced it necessarily starts showing up in the gold price. Reality will not be thwarted.

As sophisticated as labor may become, it will always be necessary and there will always be a relation between it and the cost of capital. As technology improves in all fields at more or less the same pace, the ratios between cost of labor and capital will remain fairly constant with speculating/investing opportunities arising as economic sectors may move ahead or fall behind each other on a temporary basis, or become obsolete.

Will gold become obsolete? Personally, I do not believe that. But that is my perception. History seems to be on my side.

By André D. F. Oosthuizen

André D. F. Oosthuizen Archive

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