What do Rising Gold
Prices Mean?
December 5, 2005
The market price for an ounce of gold rose to over $500 last week, a significant
milestone for economists watching precious metals and commodities markets.
The last time gold topped $500 was December 1987, in the wake of the
“Black Monday” stock market collapse earlier that fall.
Gold prices historically rise when faith in paper currencies erodes, as
investors seek the intrinsic value of gold to protect themselves from inflation.
It’s interesting to note that while the U.S. dollar has regained some
of its value relative to other paper currencies like the Euro, it continues to
lose value relative to gold and other hard assets.
This shows the folly of using one fiat currency to value another.
Gold
is history’s oldest and most stable currency. Central bankers and politicians
don’t want a gold-backed currency system, because it denies them the power to
create money out of thin air. Governments by their very nature want to expand,
whether to finance military intervention abroad or a welfare state at home.
Expansion costs money, and politicians don’t want spending limited to the
amounts they can tax or borrow. This is precisely why central banks now manage
all of the world’s major currencies.
Yet
while politicians favor central bank control of money, history and the laws of
economics are on the side of gold.
Even though central banks try to mask their inflationary policies and
suppress the price of gold by surreptitiously selling it, the gold markets
always cut through the smokescreen eventually. Rising gold prices like we see
today historically signify trouble for paper currencies, and the dollar is no
exception.
President
Nixon finally severed the last tenuous links between the dollar and gold in
1971. Since 1971, the Federal Reserve and U.S. Treasury have employed a pure
fiat money system, meaning government can create money whenever it decrees
simply by printing more dollars. The "value" of each newly minted
dollar is determined by the faith of the public, the money supply, and the
financial markets.
In other words, fiat dollars have no intrinsic value.