The Myth Of El Dorado

August 15, 2007

That's right, Jim: I don't get gold. The way I see it, the arguments boil down to this: Gold is valuable because it's always been valuable.  Well, let's all hold hands and sing Kum-bay-yah.

The weird thing about gold is that I should be in the majority. As you suggest, my argument is the sensible one. But all the smartest people I know love gold, and it obviously has a huge following worldwide. It's like a giant cult, and I haven't been initiated.

The way I see it, gold has historically been valuable as a de facto currency.  First, it was currency (think Rome). And until Nixon broke the gold standard, you could trade it for currency. The equation was gold=currency=value.

But like it or not, when Nixon broke the gold standard, that was it; the equation linking gold to value was fundamentally broken. Now, gold is valuable ... because it's pretty? I don't even think it's that pretty. Currency, in contrast, is valuable because it's backed by guns and jails.

Before all you gold bugs start taking shots at me, let me head off a few arguments at the pass.

First, I fully understand and appreciate the risk of fiat currencies. They are paper promises by the government, and central bankers can and will debase them at will.  Fed Chair Ben Bernanke looks like exhibit #1 here.  I am completely with you on that.

But just because fiat currencies are a bad idea, that doesn't make gold a good one. If you think fit currencies are bad, buy useful stuff like oil, copper and platinum. After all, that's the stuff you want to buy with all that debased currency.  But gold?

I can only think of two reasons gold should rise when a currency is debased:

  • 1) Because it has in the past.
  • 2) Because we're going back on the gold standard.

The first isn't an argument (in a post-Nixon era), and the second is absurd.

Another common suggestion that I find absurd is that gold will be a great store of value during a catastrophe.  The problem with that argument is that it only works in a nuclear winter. Anything short of a back-to-the-stone-age destruction of society leaves us right where we are, with fiat currencies and a market for stuff that we pay for with paper dollars. There's no sliding scale between here and there. And if we're talking nuclear winter, my bet is on food and water being more valuable than gold.

For me, gold's value in the 21st century is about as real as the myth of El Dorado.

What am I missing?

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