Role of Gold in the Modern World

Topics: Currency, Federal Reserve System, Gold standard, Central bank, United States dollar, Reserve currency / Pages: 4 (998 words) / Published: Mar 22nd, 2011
I am personally convinced that gold is the most valuable commodity in the world, but my conviction flows from gold's physical properties as opposed to its status as a reserve currency.
On the one hand, logic dictates that gold is an anachronism in terms of its role as a reserve currency - because the amount of gold per capita has been decreasing over the years as the world's population has expanded faster than new gold has been mined. There is simply not enough gold - either in existence or, probably, underground - for the metal to be capable of application to the roles of both currency and commodity. Additionally, there are some physical properties of gold which have only recently been discovered - which, in time, are likely to cause the demand for gold as a commodity to rise significantly. If there is an inadequate amount of "currency" gold now, there will be even less in the future.

On the other hand, over the short term, markets are not driven by logic, they are driven by human emotion. It follows that, over the short term, unthinking people will turn to gold in panic if/when the world economy starts to unravel.

It follows that if one views gold as a long term proposition, one can probably ignore the short term wild gyrations which manifest, as fear and greed vie with each other for supremacy. The only caveat is that gold pays no interest, and so one's investment in gold needs to be Balance Sheet (asset) oriented as opposed to Profit and Loss (income) oriented. In summary, gold is probably an insurance policy over the foreseeable future, and may turn out to be an extraordinary investment over a generational view - provided the world economy survives.

To me the most compelling question before us is not whether or not gold is going to rise, it is whether or not the Central Bankers of the world are going to lose control of the world economy. My reasoning is that if they do lose control, the value or otherwise of gold - in any role - is probably academic.

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