Gold - Commodity or currency?

[new_trader]

It's very simple... The ability to increase money supply when the situation calls for it is a massive advantage. Why do you think the Chinese have been kickin' ass for the past couple of decades? It sure ain't 'cause they're on the gold standard. A directed command economy allows them to very easily turn the taps on and off, which is an extreme example of the sort of competitive advantage I am referring to..

It's easy to say "The ability to increase money supply when the situation calls for it is a massive advantage" without actually stating what that advantage is. The Chinese have been kickin' ass because they are a productive economy. I'm looking at history as a guide to what has happened and during the gold standard America rose to become an economic and military superpower, since leaving the gold standard it has gone into decline. Some critics would say that the reason for the shift is because China's business is business and America's business is war. However, if you look throughout history, one reason countries have debased their currencies and gone into debt is to fund wars. Being on a gold standard makes this a harder thing to do.

A gold standard is designed to prevent countries expanding their money supply thereby forcing them to live within their means. History has shown that as economies evolve they move away from ‘dirty’ manufacturing jobs and become more ‘service’ sector based. If that is the case, who is making the ‘stuff’ that service sector economies consume? Would you be happy getting dirty and working up a sweat to sell your ‘stuff’ to someone else who is doing nothing but lying on a beach and printing money? At least gold involves labour and consumption of resources, so it is ‘production’ of some sort.

 

[itmtrading]

gold is a commodity and a currency both
Mainly gold is a currency, but the fact that approx 70% of gold usually goes into jewellery cannot be ignored so it goes to commodity.

 

[TheBramble]

LOL

There certianly is a lot of fool's gold in here.

 

[Martinghoul]

It's easy to say "The ability to increase money supply when the situation calls for it is a massive advantage" without actually stating what that advantage is. The Chinese have been kickin' ass because they are a productive economy. I'm looking at history as a guide to what has happened and during the gold standard America rose to become an economic and military superpower, since leaving the gold standard it has gone into decline. Some critics would say that the reason for the shift is because China's business is business and America's business is war. However, if you look throughout history, one reason countries have debased their currencies and gone into debt is to fund wars. Being on a gold standard makes this a harder thing to do.

I don't know how much more explicit I can be. The advantage relies on the ability of the Central Bank or the government to manipulate money supply, whether through monetary policy or exchange rate policy. The yuan peg is the bazooka that would NOT be feasible if China were on the gold standard. That and not some inherent "special" productivity of the Chinese economy is the reson for its economic outperformance. In fact, the Chinese economy on the whole is much less productive than the West (hence, their efforts to catch up), but that's offset more than fully by the peg. As to the wars, you have it totally backwards. In the past, when a country went to war, it placed such a strain on the economy that gold standard had to be "suspended". Hoping that the gold standard imposes so much discipline on the govts that it can prevent wars is beyond wildly optimistic, it's just delusional.

A gold standard is designed to prevent countries expanding their money supply thereby forcing them to live within their means. History has shown that as economies evolve they move away from ‘dirty’ manufacturing jobs and become more ‘service’ sector based. If that is the case, who is making the ‘stuff’ that service sector economies consume? Would you be happy getting dirty and working up a sweat to sell your ‘stuff’ to someone else who is doing nothing but lying on a beach and printing money? At least gold involves labour and consumption of resources, so it is ‘production’ of some sort.

Here you're confounding a whole bunch of different unrelated issues. Countries living within their means has nothing to do with the expansion of money supply. Greece doesn't have its own central bank, so it has no authority over its money supply, yet it's perfectly capable of living beyond its means. China has been expanding money supply till it can't see straight, yet it finds itself in the most envious fiscal position, with more reserves than it knows what to do with. As to the service sector vs manufacturing, that has absolutely zero to do with the gold standard. Again, China is about as far from the gold standard as you can imagine and it has all the manufacturing it can hope for and more. All that's telling me is that it's so much more about an aggressive exchange rate policy than anything to do with the gold standard.

 

[new_trader]

Hoping that the gold standard imposes so much discipline on the govts that it can prevent wars is beyond wildly optimistic, it's just delusional.

What I meant was a gold standard makes expanding its money supply more difficult, not going to war. A few countries are currently embarking on 'currency' wars, so why you think being free from a gold standard gives any country a competitive edge is beyond me. If every country can print as much money as they need, where on earth is the advantage?

Here you're confounding a whole bunch of different unrelated issues. Countries living within their means has nothing to do with the expansion of money supply. Greece doesn't have its own central bank, so it has no authority over its money supply, yet it's perfectly capable of living beyond its means. China has been expanding money supply till it can't see straight, yet it finds itself in the most envious fiscal position, with more reserves than it knows what to do with. As to the service sector vs manufacturing, that has absolutely zero to do with the gold standard. Again, China is about as far from the gold standard as you can imagine and it has all the manufacturing it can hope for and more. All that's telling me is that it's so much more about an aggressive exchange rate policy than anything to do with the gold standard.

Other countries have expanded their money supply to maintain the peg to the $US because it is printing money like mad. The USA was once was on a gold standard and so other countries were on a de-facto gold standard as a result. No doubt you are counting GDP as 'production' even if around 70% of US GDP is consumption (Consumer spending).

 

[Martinghoul]

What I meant was a gold standard makes expanding its money supply more difficult, not going to war.

Yes, agreed... That's precisely my point. Sticking with the gold standard in a world where everyone honors their promise to play by the rules and do the same might be a good idea in theory. However, a world like that doesn't exist in reality, which, to my mind, means that the gold standard is a nice fantasy, no more.

Other countries have expanded their money supply to maintain the peg to the $US because it once was on a gold standard. Countries were on a de-facto gold standard as a result. No doubt you are counting GDP as 'production' even if around 70% of US GDP is consumption (Consumer spending).

Are you joking? China pegs the yuan to USD for reasons that have absolutely zero to do with the fact that the US was once on a gold standard. Moreover, once you allow governments to peg (whether to another "gold" ccy or gold directly), wouldn't you agree that this throws the whole gold standard out the window? As to GDP, your comment makes no sense. To make a long story short and simplistic, consumption = production - imports + exports, so once you adjust for imports/exports, consumption IS production. The stuff that the people consume needs to be produced.

 

[TheBramble]

consumption = production - imports + exports

- inventory

 

[Martinghoul]

- inventory

Yes, I did say "simplistically"... There's other stuff in there, obviously, but my point stands regardless.

 

[new_trader]

Yes, agreed... That's precisely my point. Sticking with the gold standard in a world where everyone honors their promise to play by the rules and do the same might be a good idea in theory. However, a world like that doesn't exist in reality, which, to my mind, means that the gold standard is a nice fantasy, no more.

I have to disagree. History has shown that every currency and economy has failed for the exact reasons you are labelling as advantages. Sound money = strong economy. Sound money is dependant on its supply being limited and a gold standard limits the supply of money.

Are you joking? China pegs the yuan to USD for reasons that have absolutely zero to do with the fact that the US was once on a gold standard. Moreover, once you allow governments to peg (whether to another "gold" ccy or gold directly), wouldn't you agree that this throws the whole gold standard out the window? As to GDP, your comment makes no sense. To make a long story short and simplistic, c - imports + exports, so once you adjust for imports/exports, consumption IS production. The stuff that the people consume needs to be produced.

I look at the balance of trade of the US and the UK and compare it to China. China is maintaining the peg so that it can sell its 'stuff' to US consumers. The Chinese will eventually wake-up to the fact that the US has been giving them nothing but worthless I.O.U's backed by nothing and they will allow their currency to appreciate. When that happens their standard of living will rise (They can consume their own production instead of sending it the the US) and it will decline in the US. Some of the more informed experts think the Chinese will even back their currency with gold. The US on the other hand needs to increase its debt ceiling to meet its obligations. Imagine that, increasing the limit on your credit card otherwise you can't afford to pay your bills. Fiat currencies, what a great advantage I think it's time we just agree to disagree and see how the future pans out.

 

[Martinghoul]

Sure thing, I am happy to agree to disagree...

 

[new_trader]

Priceless

http://online.wsj.com/article/BT-CO-20110524-700297.html

 

[forker]

There is no historical reference for a highly denormalised economy such as china reverting to a normalised economy. Their potential for being a consumer powerhouse is met with a gauntlet of convoluted problems from the normalisation process which could implode on them. People can speculate all they like but ultimately they could prevail or fail from such a change.

 

[Atilla]

Been following the blogs off and on through out the day with great interest.

I am of the same opinion as NT - the rest of you who disagree are all wrong. imho... :smart:


In summary - both systems (in fact any system) can work if all participants adhere to the rules of the system. If one is to choose which is the more advantages - and more thoroughly tested then it is - ultimately gold without doubt. You don't have to pay in gold as long as money is backed by promise to pay in gold.

40 years and fiat currencies are pretty much risk infested and problematic, collapsing, imploding, bursting etc etc - label it as you like.

Gold has served world global trade for 000s of years.


Currencies backed by gold could have easily maintained global trade without a doubt. One only has to ask how much anything was worth 200 years ago, 150, 100, 50, 40, 30, 20, 10 to figure this out. It is simply like basing an index. One would base it on quantity of gold.

I'm surprised by all the rubbish put forward to be honest. It is like this is what we know and nothing else will do.


Price/Cost x Quantity of Goods & Service == Ms x Frequency of Exchange.


If you have more goods and services you simply increase economic consumption (frequency of exchange). However, one wishes to work it out this equation has to balance or nothing else will do. So if Ms increases without corresponding increase in output of G & S -> prices increase.


Finally, everything is a commodity including money - for goodness sake this is beyond dispute... All those who disagree - go and stand in the corner and think about it until your lights come on.

Every commodity can be exchanged for any other commodity once an exchange rate is agreed by two parties. This is why you may exchange the same coat for £10.00 or $16,20 using different currencies at different agreed exchange rates.

Money is a commodity. Gold is a commodity. They are all valued in terms of a number which becomes the exchange rates once buyer and seller agrees.

You capiche! :cheesy:


Gold rules and I suspect is likely to do so in the future too - only a matter of time...

 

[dmt257]

Gold is the future. Fiat currencies never last

 

[Martinghoul]

Gold has served world global trade for 000s of years.

Gold rules and I suspect is likely to do so in the future too - only a matter of time...

Well, that's silly... Slavery also worked wonders for the world for 1000s of years. People used to barter for a much much longer time than the idea of "currency" has been in existence. Does that mean we should be going back to the good ole days?

 

[Atilla]

Well, that's silly... Slavery also worked wonders for the world for 1000s of years. People used to barter for a much much longer time than the idea of "currency" has been in existence. Does that mean we should be going back to the good ole days?

Is that your reasoning process? You want to pleey games? :cheesy:

Man eats to live since the beginning of time - does that mean we should stop eating now? (I don't understand relevance of slavery to gold or fiat currencies). I know it is confusing but I hope someone catches my drift...

Exchanging currencies is a form of barter too. Just more efficient than exchanging eggs and potatoes. How many currencies exist in the world today. Why not just have one to stop all this process of bartering currencies.


I'm afraid your logic is flawed. Need to consider gold and fiat currencies based on evidence, experience - input and output results etc etc.


I reckon man is smart enough and if required gold could easily be used to base national currencies -> perhaps eventually leading to a single gold currency.

The future is the yellow stuff.

 

[new_trader]

Does anyone here think that the US founding fathers were naïve or clueless about “Modern Economics” (Whatever that is)?

http://www.kwaves.com/fiat.htm

The founding fathers were concerned about the unrestrained control of the money supply. One thing they all agreed upon was the limitation on the issuance of money. Thomas Jefferson warned of the damage that would be caused if the people assigned control of the money supply to the banking sector. Many of the founding fathers experienced the damage caused by fiat currency. Most of the revolutionary war was financed by worthless currency called "Continentals".

THE UNITED STATES CONSTITUTION
Section. 10.
Clause 1: No State shall enter into any Treaty, Alliance, or Confederation; grant Letters of Marque and Reprisal; coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts; pass any Bill of Attainder, ex post facto Law, or Law impairing the Obligation of Contracts, or grant any Title of Nobility.

 

[TheBramble]

Do you have a point?

As interesting as one or two of the posts have been, economics can easily argue both sides of the coin without any obvious contradiction. And while one will be 'proven' to have been correct in hindsight, the other can with a little dexterity be shown to have been correct in the abstract, but not in the specifics of that particular instance which has extenuating circumstances such that the actual result was just as inevitable when viewed in conjunction with the theory that was if not the exact opposite of the ‘successful’ explanation or prediction, then was at least something quite different.

In short, it’s a great arena for talking heads that don’t have to use their ‘skills’ for actually making money in the markets. They make theirs from talking about it.

 

[new_trader]

Do you have a point?

Yes, do you?

economics can easily argue both sides of the coin without any obvious contradiction.

Really? Which school of economics would you use then?

 

[TheBramble]

Really? Which school of economics would you use then?

I would have thought my prior post made clear my view on any/all of them. Great if you're doing a PhD on comparative economic theories, you could hang it out for months if not years, and even make a career of it and get invited onto CNBC etc. But none of it has any direct relevance to trading.

Not that this thread pretended to have any and that’s fair enough. Given the Ops question, it was never going to be cut & dried. But it is interesting to see how bods hypothesise their latest Wikipedia trawls into plausible economic theory. Shows you just how easy it is. Politics and Economics. The last of the great soft sciences still being taken seriously.