Money - Part 2

The only reason people buy currency is because they need to use that currency for something. Just like people buy soybeans because they want to make tofu. The forex, however, has turned into a market where I would imagine a majority of the trades are now speculation. Real money has real use, and I have to use Canadian dollars to buy Canadian bonds, just as real soybeans have real use, and I need soybeans to make tofu. There are speculators who bet on the market that there will be high demand for soybeans due to a drought, blight, or rising demand for tofu. This is no different from speculators who purchase the Canadian dollars because Canadian bonds are a good buy and they feel the dollar is under-priced. People who speculate on gold, silver, and platinum are also betting on commodities, not articles with intrinsic value. Silver and gold have skyrocketed in value in part because of the perception that they are shelters from the storm, but this is something of a false perception: gold and silver are beneficiaries of demand - in part driven by the speculation that they are a good place to shelter money. Did you follow that? Gold is benefiting from the financial uncertainty of the markets, and the fact that people think it is a good place to shelter their money. It's got value primarily because it is a catch-22 of perceived value: I think it's a shelter so I buy it so it goes up in value so its a shelter.

Precious metals are not immune to demand-driven shocks. Their value does not track inflation. They do not have a guaranteed increase in value over all time periods. I'll cite one case in point: platinum's market crash in late 2008. An article makes it clear why platinum has value: it's used in car catalytic converters. Why does gold have value even when years worth of gold stock is above-ground? I love this quote:

Why is gold produced?  There are plenty of tons of it in aboveground stockpiles, decades based on annual consumption, so why burrow miles into the earth to bury it in a vault?
The value gold adds to society is in its ability to assist us in performing mental calculations of value.  When using gold as the numeraire a much more accurate assessment can be made when allocating capital.

Soooooo... what the author is saying is that platinum has a price based in demand for automobiles. The value of gold is that it helps us with math. IT HELPS US WITH MATH. She openly stated that there is a glut of unused gold above ground that is doing sweet nothing, which smells of bubble to me. Here's more to love, from the Economic Times of India:

Central banks in emerging nations have been buying more of the metal to diversify their reserves. Most central banks hold their reserves in currency, and mostly in dollars. While many have diversified to increase their holding of other currencies such as the euro, economic troubles have meant the value of the currency holdings has depreciated vis-a-vis the domestic currency. In comparison, gold has been rising, and central banks holding big quantities of the metal managed to protect themselves from losses due to erosion of reserve currencies.

I'd like to point out first and foremost that many readers might have initially thought that all national reserve banks MAINLY held their reserves in gold... but it just ain't so. The Economic Times also mentions, "Gold prices are far more volatile than platinum, as has been evident during the course of this week. For that matter, over the past few days, as perception of risks eased, so did gold prices. Platinum prices draw their strength from economic cycles and industrial demand." Platinum's price is based on demand. Gold's price is based on lack of confidence in the economy. One of these things is an idea, and the other is real. A bunch of people acquiring large stockpiles of stuff and not selling it because they think it adds value to their portfolios is not a recipe for long-term growth in value: it's a recipe for a bubble bursting, just like it did on radio stocks in the 20s, tech stocks in the early 2000s, and housing at the end of 2007.

I'll take one last swipe at gold by saying that before the stock market crash in early 2000's, people bought tech stocks because hey... they were winners. The tech stocks crashed and then people ran to the only two safe bets left: gold and real property. In 2008, people fled from property, and now they only have gold to flee to. In times like these, people buy and hold. When there's a load of unused stuff out there on the market, it takes but one perception of a move from that commodity to start a flight from it, too. I would love someone to explain to me, after some financial apocalypse, how they intend to redeem their gold for useful items? It will be just as useful as money: a commodity that is neither food, nor gas, nor booze. If you want something that survives economic meltdown... build a still. But that is not what I came here to write about. I came here to write about money.

On to part 3.