Doug Casey is an American free-market market economist, financial author and entrepreneur. He has been writing a monthly investment newsletter, the International Speculator since 1979 and I always find his ideas quite refreshing. He is also somewhat of a perma gold bull, but nevertheless argues his case convincingly, as gleaned from the interview below with Louis James, editor of the International Speculator.
But before getting stuck in the discussion, Adam Hewisonâs (INO.com) has just produced a short technical analysis of the short-term direction of gold. Click here to access the presentation.
Here is the first section of Caseyâs interview:
L: Doug, weâve talked about cars, cows, and cash, but the investment world thinks of you as a gold bug, so letâs give that a go; why gold?
Doug: Sure. First of all, itâs because gold is actually money. Itâs an unfortunate historical anomaly that people think about the paper in their wallets as money. The dollar is, technically, a currency. A currency is a government substitute for money. Gold is money.
Now, why do I say that?
Historically, many things have been used as money. Cattle have been used as money in many societies, including Roman society. Thatâs where we get the word âpecuniaryâ from: the Latin word for a single head of cattle is pecus. Salt has been used as money, also including in ancient Rome, and thatâs where the word âsalaryâ comes from; the Latin for salt was sal (or salis). The North American Indians used seashells. Cigarettes were used during WWII. So, money is simply a medium of exchange and a store of value.
By that definition, almost anything could be used as money, but obviously, some things work better than others; itâs hard to exchange things people donât want, and some things donât store value well. Over thousands of years, the precious metals have emerged as the best form of money. Gold and silver both, though primarily gold.
There are very good reasons for this, and they are not new reasons. Aristotle defined five reasons why gold is money in the fourth century BC (which may only have been the first time it was put down on paper). Those five reasons are as valid today as they were then. A good form of money must be: durable, divisible, consistent, convenient, and have value in and of itself.
L: Can you elaborate on that?
Doug: Yes, and from them, we can draw inferences that will help us anticipate the fate of the dollar.
First, letâs take durable. Thatâs pretty obvious - you canât have your money disintegrating in your pockets or bank vaults. Thatâs why we donât use wheat for money; it can rot, be eaten by insects, and so on. It doesnât last.
Divisible. Again, obvious. Itâs why we donât use diamonds for money, nor artwork. You canât split them into pieces without destroying the value of the whole.
L: If I paid for a new Ford GT with the Mona Lisa, what would be my change - a small canvas by Picasso?
Doug: [Laughing.] Thatâs right. Maybe youâd get millions of those paintings of Elvis or Jesus on velvet.
Consistent. The lack of consistency is why we donât use real estate as money. One piece is always different from another piece.
Convenient. Thatâs why we donât use, for instance, other metals like lead, or even copper. The coins would have to be too huge to handle easily to be of sufficient value.
Value of itself. The lack here is why you shouldnât use paper as money.
Actually, thereâs a sixth reason Aristotle should have mentioned, but it wasnât relevant in his age, because nobody would have thought of itâŚ
L: It canât be created out of thin air.
Doug: Right. Not even the kings and emperors who clipped and diluted coins would have dared imagine that they could get away with trying to use something essentially worthless as money.
L: I think we can forgive Aristotle for the oversight.
Doug: I think so. At any rate, these are the reasons why gold is the best money. Itâs not a gold bug religion, nor a barbaric superstition. Itâs simply common sense. Gold is particularly good for use as money, just as aluminum is particularly good for making aircraft, steel is good for the structures of buildings, uranium is good for fueling nuclear power plants, and paper is good for making books. Not money. If you try to make airplanes out of lead, or money out of paper, youâre in for a crash.
That gold is money is simply the result of the market process, seeking optimum means of storing value and making exchanges.
But itâs not something that suits governments, because paper money is an excellent means for governments to tax people indirectly, surreptitiously, through inflation. Thatâs one reason central bankers love paper money, but also, phony economic theories, like those of John Maynard Keynes, hold that the government not only can but should meddle with the economy, and the ability to print paper money gives them a means to do that.
In todayâs world, not only do people around the world take it for granted that paper is money, but that it should be so.
But itâs all nonsense. Itâs one reason for taking a gloomy view of humanity â people will believe almost any kind of claptrap, if the story is retailed by those in authority.
After the current system collapses, as every paper money system in the past has collapsed, some form of money will have to replace it, and itâs almost certainly going to be gold.
Click here for the full interview.
Source: Conversations with Casey, September 23, 2009.
