Saturday, November 21, 2009
Gold is Wealth
Why should we own gold? What is gold good for? What does it mean to say "gold is wealth"? And what exactly is wealth? We have contemplated the pure concept of money.  How about the pure concept of wealth?
We all have needs. In fact, we all have the same needs in sustaining our lives. In some things, some of the most essential needs, we are all equally and extremely wealthy. We could even build a pyramid of these needs and their supply relative to our demand for them. In many cases, the most needed things are in such complete supply as to overwhelm demand. No need to hedge against a future shortage of these things through derivatives or swaps. You see, wealth in fact is anything that helps us in meeting our future needs. To have more than you demand for immediate survival is to be wealthy!
Take, for example, the Higgs Boson. Assuming this particle actually exists, it is the foundation of all things, of all life. It is something we all need in order to survive! We would simply disappear (or not exist) without it. It is what makes matter matter, so to speak. And again, assuming these things really exists, then there must be plenty of them around. More supply than we demand. Or at least, theoretically, the perfect supply to meet demand at all points in time.
Another essential need we all have is gravity! What would you do if you ran out of gravity? Float away? Thankfully we have a plentiful supply of gravity that "outweighs" demand. ;)
How about sunlight? Are you wealthy in sunlight? Well, we may not all be equally wealthy when it comes to sunlight, but there is no doubt that we all need it to survive. And amazingly enough, supply seems to always meet demand without the need for hedging or storing sunlight for future use.
Moving on up the pyramid we come to oxygen. Yes, there are some situations in which it pays to store oxygen for future use. If you are planning a trip to outer space or, perhaps, to the bottom of the ocean then it would make sense to hedge your bets and load up on more oxygen than you think you might need. The risk:reward ratio highly favors a surplus of oxygen in situations where it is possible for demand to outrun supply!
Topping off the pyramid we have the needs we humans all strive to secure, food, clothing and shelter. And in our modern world of electronics and internal combustion we could also add energy to this list. Under the most extreme conditions, we could probably find wood to burn in the forest for cooking and heating. But who wants to live like Ted Kaczynski (pre-arrest)? Even Mad Max had fuel for his car!
But luckily for us, 5,000 years of trade have taught us that we don't need to plan as meticulously for survival as an astronaut or a deep sea diver. As Aristotle  explains:
We can generally blunder our way through day to day and year to year in the comfortable fact of life that, through the open market--through the ability to trade with others--we can generally obtain what we materially need in one facet in exchange for some of our own wealth in another facet. Food for clothing seems like a pretty reasonable medieval exchange, doesn't it?
We all know the inefficiencies of barter, don't we? As civilization and trade evolved from the dawn of man to the 20th century, Gold revealed itself to be the single most reliable, universal agent that could be traded in various quantities for anything anywhere on Earth. Maybe most remarkable in this is that Gold is not itself something that is needed or consumed in satisfaction of our basic material needs for survival. But due to it being perfectly and uniquely suited for this universal role in trade for any other person's available wealth as necessary to meet our own specific needs, Gold has become such a near proxy for the real wealth we require for life that many of us have permitted ourselves the casual inclusion of Gold into our otherwise strict definition of wealth.
Those in the financial industry have come to call this universal wealth asset (Gold) by the name "money," but that unnecessarily confuses the issue. In their efforts to facilitate various objectives in modern life, those in the financial industry endeavored to master the alchemist's craft--to methodically create "money" from such substances as worthless base metals or from paper. Even the village idiot can clearly see that "the bankers and others" didn't succeed in creating Gold. But the village idiots were never so sure that these nickel coins and paper notes weren't in fact successfully turned into this other thing that the experts called "money." As for me, I'm comfortable calling these lesser creations by the name "currency," and further, I recognize that they can and do serve a useful purpose in modern society. With this distinction I am not so easily baffled as the village idiots into thinking that these currencies created in the image of "real money" can actually attain the superior wealth function of the asset they sought to imitate--that being Gold. And you shouldn't be fooled either.
Every currency made in imitation of Gold goes hand in hand with the financial architecture that supports it right into the trashbin of failed efforts, and are logged into the collective wisdom of those who vow not to be fooled again. Based on the "conception, care, and feeding" of the various currencies and their supporting architectures, the life span--or timeline--of predictable rise and fall milestones may vary in length from one currency to another. They may serve a purpose while they last, but they all suffer the same eventual demise at the hands of inflation. Remember, these currencies are man's artificial attempt, time and time again, to imitate Gold for use in modern commerce. They are built for speed--built to be borrowed specifically, and spent rapidly! They are not suitable for saving. For that you must turn to the master--the near-wealth proxy upon which all currencies must bow down in inferior imitation.
So you see, learning how the world works is all about each man coming to the understanding about the real wealth we all require to best ensure our survival. Knowing that Gold is the master proxy for our life's day-to-day and year-to-year shifting requirements for food, clothing, shelter, and energy, it simply makes more sense to gather in Gold for later use than to gather in clothes (that we may outgrow,) food (that may spoil,) houses which are more than our needs, or energy (that we can't store.) You see, time bears witness to this undeniable fact: Gold can be called wealth because it is an enduring wealth proxy in exchange for our life's needs. Currency, on the other hand, serves a specific modern economic purpose--to be borrowed and inflated in placation of man's immediate desires. It is not wealth, it fails as a proxy for the Gold it tries to imitate. Do not confuse the two.
I think we can chop off the bottom four "foundational" layers of our pyramid now, since they are in full supply. Let's think of them as the solid ground upon which this wealth pyramid stands.
Now that we have established a solid pyramid of life's necessities and the need for a pure wealth concept in order to secure a future supply, let us take another look at John Exter's inverse pyramid of paper products based on wealth derivatives. I first introduced this concept on my blog in the post called All Paper is STILL a short position on gold. And by the way, George Washington himself  helpfully pointed out that the image I used, from Wikipedia, may not be the correct Exter pyramid. Perhaps Trace Mayer's pyramid  is better. In any case, let's make a fresh one for our conceptual purposes:
Next, let us place this paper derivative inverse pyramid atop the real wealth pyramid. Let's see how it looks!
Does it look a little like an hourglass?
Now picture this. The inverse pyramid on top is actually ten (10) times larger than the pyramid on the bottom. And it is 100 to 200 times larger than the golden capstone!
In ancient times gold was the very best item for trading and as such, it became the very best wealth reserve. Later, gold became currency and came to be known as money. Today, gold is commonly believed to be only a commodity and is traded as such.
I propose to you that we can estimate that as a mere commodity today, gold is relegated to a trading range of between $700 and $5,000. As a currency, which it has not been since at least 1933, it would be range-bound between $4,000 and $11,000 according to Jim Rickards.  And set free to fill its ancient role as a wealth reserve, gold will rise to somewhere between $10,000 and $100,000 in today's dollars.
Be wary of the "men's suit comparison". Just a couple hundred years ago a wealthy man amidst 1 billion others on this planet might have had a handful of fine men's suits, a nice house and a large plantation. Today a wealthy man would have dozens of fine suits, a couple mansions, a large yacht, 29 flat screen TV's, an iPhone, and a sizable paper-wealth trading account. And that is among 6.75 billion souls on the planet. Compare wealth with wealth, not suits with suits.
Can you imagine a gold price of AT LEAST $100,000 per ounce? How about a real purchasing power increase, measured in today's dollar purchasing power, to somewhere between $10,000 and $100,000? In the bell curve below we can see that the most probable PP landing zone is between $25,000 per troy ounce and $85,000 per troy ounce. Can you think of a better reason to invest in physical gold coins right now? How about protection from hyperinflation? $100,000 is the bare minimum in this case. The top is infinite! Imagine $12 trillion per troy ounce... the size of today's US national debt reduced to one single gold coin you could buy tomorrow! Can you imagine it? It doesn't really matter if you can't see it like I do, as long as you buy the coin. As JFK liked to say, "a rising tide lifts all boats", not just the ones that believe in rising tides.
You don't have to buy my story as long as you buy gold!
 Gold is Money - Part 1
 Gold is Money - Part 2
 Gold is Money - Part 3
 Full credit goes to Aristotle for his acute clarity of Thought. Sir Ari, where are you?
 The first president of the USA converses with FOFOA
 The Great Credit Contraction Liquidity Pyramid - By Trace Mayer
 Jim Rickards on CNBC's SquawkBox, 11/19/09