Why is the price of gold going down?
There are a million reasons, one of which is that the market is rigged and it goes the way it’s directed to go. But there are other factors at play that affect the price of gold. Historical, economic, political…all these sectors have an effect. Here’s a little historical perspective:
Gold has historically been a measure of the world’s economic health. So if the world economy was in trouble, if things were bad or the economy was sluggish or there was a war going on, traditionally gold would seem to rise in price.
Conversely, if the economy of the world was healthy, if peace breaks out (which is rare) gold would go into hibernation and drift downward in price.
This has to do with the fact that most people have again HISTORICALLY viewed gold as a safe haven, a place to park your money where it wouldn’t be eroded by inflation. Gold has also been seen as a guarantee against loss of value associated with instability and fluctuating equity prices.
So if you had a fixed amount of money saved, you could put it in gold and while the AMOUNT of money you received for it if you chose to trade it in might change…the VALUE of the money it could be redeemed for would stay relatively the same.
This become increasingly true after the US left the gold standard in the mid 30s. Gold saved kept its value. If you had a gold coin, it might seem to be worth more if you traded it in years later, but with inflation, the VALUE of the coin or bar was consistent. It bought the same amounts of things, it held value very well.
So that’s how gold has been viewed for decades. A safe haven, a place where you store value for the future to protect it against the ravages of inflation and a non-gold standard banking system.
But this use of gold has changed considerably over the last 60 years. The government in general and the effects of the Federal Reserve System in particular have have created what is called a fiat currency, which means that the government has essentially thumbed their nose at the traditional market forces that have governed the value of assets based on a variety of factors and simply determined the value of money arbitrarily. In addition, they choose when and where money is injected into the nation’s money supply – allegedly controlling inflation and ensuring stability. Allegedly.
So in reality gold has not changed. Nothing about the metal itself has changed. But the way it is traded HAS changed. And the function it serves has changed. I will argue that the environment AROUND gold has changed and that those who ignore the market in favor of their own devices will ultimately suffer the same fates that all governments who create fiat currencies suffer.
Every single government that has diluted its money supply has eventually been replaced as a world power or defeated. There is just no precedent for devaluing your monetary supply in an effort to ensure liquidity or stability and surviving long term. It hasn’t happened yet and I don’t think that it will happen to the US.
I’ll talk about the reasons why this is the case in my next entry: How the Romans Ruined Their Money and What It Means to the US.
