But it is not just Religion where value concept is complex.
There are many other things which are valuable but we are confused about the
nature of valuation. Just like our Gold. We are mad for this and it sits atop
among the most valuables of our life. But ask anybody about the reason of its
valuation and we will hear nothing concrete.
It is called the store of wealth….it can store value…so it is
an investment vehicle. The purporters of this view take Gold as an investment
option where people can park their money and safeguard the same. They don’t see
any other significant function of Gold. Here demand for Gold is because of
something like Networking effects (I have
explained the Networking effects in the post related to ecommerce business
valuation, click Here ) where people value Gold highly because it is
valued so highly by others. I am after it as whole world is after it. Then there are others who see Gold as worthy
of satisfying our needs like luxury, jewelry and industrial. But again why we
take Gold as worthy of parking our savings? What is making it so valuable?
Networking effects!!
So Gold is faced with two faced anomaly…Whether
Gold is an Investment vehicle or whether it behaves like a commodity?? Commodity is something which can
satisfy some needs of ours like Clothes, food, fuel etc. Whether Luxury/Jewelry
are those needs? But these functions are derived due to associated high value
of Gold which makes it desirable. So question about high value of Gold still
shines.
Money is a great
Commodity created by Humans
To answer this, we need to walk along with first humans…our
origin. Humans in those times were just living for foods…so I was just
wandering whole day in the thick forests for food…there was nothing else in our
life. But one day, I met a person in forest who was peeling a coconut with a
stone tool and at once that humble stone became valuable for me. To get the
stone, I offered him 10 apples…but he declined my offer. I revised my offer to
10 fish (as fish are much difficult to catch, hence more valuable) and stone
was in my hand. So there we were, first trade of human history happened. Humans
then realized that they could exchange things among them and live a much richer
life. We call this system Barter. It is still present in so many of tribes.
But as our population and number of products
grow…this trade via Barter became increasingly difficult. I am having Eggs which is not
required by X who is having shoe. Shoe is required by Y who is having Wheat
which is required by me. But unless we three meet at one place, this cross
trade will not happen. Also there were times when quantities of exchangeable
goods are not comparable like trading a wooden bed for Milk. Like a teacher,
for him to get milk he needs to find a milkman who is ready for exchanging milk
for some teaching lessons!! Very difficult indeed.
So
humans were looking for some neutral commodity which was required by everybody
and could act as a clearing vehicle. So they tried so many things as mean of
exchange like Salt, Black pepper, Rice, Sugar, Butter etc. Like Butter, it is
demanded by everybody so it is more marketable. So if there is something
about which everybody is sure that it will be more readily sold…then there will
be greater demand for the same as it can act as medium of exchange. But these
things suffered from some limitations which made them to look out for something
better…..and then they found GOLD. Gold solved the search for Money.
Money is the most important invention of the
humanity as only due to this that large scale trade was made possible which
promoted the production of new things and humanity grew along with. Money was a
Commodity the function of which was to facilitate exchange of things. Other commodities could be expressed
in terms of money and so could be traded easily. This Money commodity was the
creation of Humans unlike other natural commodities which were either a part of
earth or derived from other commodities. I think this invention of Money should
stand among the most valuable inventions of humanity like Fire, wheel etc.
Money was the single most thing which transformed the humanity from barter to
easy trade. So money is a commodity which satisfies our needs of facilitation
of exchange and trade. It is not a store of wealth but something which can be
used for trade of wealth.
Gold is the best medium
of Exchange: The Money
The things humans
tried before Gold as mean of exchange or Money had some great limitations like
they were perishable. Over time Rice, sugar, Butter etc. would degrade and
loose most of their identity and value and so ceased to be a commodity. There
were also problems of easy availability and easy supply which can be increased
at ease any time. These were not portable either like for buying something in
big quantity or valuable we needed to carry a big quantity of these might be in
thousands of KG’s. So we were in search for something which is best suited for
use as money. How can a carpenter exchange a big bed made by him for meeting
his requirements of Food, cloth and Milk? As he is having one large item to
trade with a number of persons all having different items of his need. Gold was
having all the necessary qualities.
1)
Not easily available: It is not easy to produce Gold and this is the quality which
makes Gold as best suited for money. Money should not be easy to produce. Like
one can increase the supply of Rice very easily which can raise the inflation
and relative prices will vary frequently. But it is very difficult to produce
Gold…requires a lot of effort and investments…even then the chances of getting
the Gold are not guaranteed. The quantity of money should not be increased at
will. In fact most of the easily mineable sources of Gold is already exhausted
and it is getting increasingly difficult to mine more Gold every year.
2)
Durable: Almost
99% of Gold which is ever mined (around 180000 Metric tons) by Humanity is
still lying above earth because Gold is one of the most durable elements which
can withstand the vagaries of environment and time very well. Gold is the most
non-reactive of all metals and it never reacts with oxygen which makes it corrosion
free.
3)
Portable:
Gold can be reduced to small sizes even up to micron levels. It makes it
possible to trade it for small value items to most valuable of items. It is
very easy to carry Gold for trade. It does not require any special storage.
However silver was mainly used for small value exchanges and gold for much
expensive trades.
4)
Some other reasons like production of Gold is not dependent upon
the variables like rain, drought in case of Sugar etc. Gold is not required for human
consumption so there is no dilemma whether to keep it for money or used for
human consumption like sugar, butter. Also producers of Gold will not run for
overproduction as more production than required will decrease the value of Gold
and its exchange value.
So as we can see Gold derives its value for its
being best suited as Money. As it is fulfilling its function as money so it is desired as money to
use it for trade and commerce; the building blocks of our society and growth.
Gold is valuable and unique because of its being capable of performing the role
of money. So we know now that Gold is demanded and behaves as a commodity.
So Gold was our not first but best money. But this invention
was not a sudden decision but a slow gradual process wherein humans understood
the working of a market place, the difficulties faced by them in clearing of
trades due to not so good Moneys. These difficulties made them aware about
looking for things which could eliminate the limitations of other Moneys….and
in their quest they finally found the Gold.
Gold Standard
Slowly Gold was replaced by Government backed Currency notes.
These currency notes were nothing but a depositary certificate of Gold. Every
note could be redeemed for a promised fixed amount of Gold. So still Gold was
the real currency or money of the world (I will
explain this shift from Gold to currency note in another post, I am leaving it
here due to length of this post). The first truly global reserve currency was
the British pound sterling. The world’s great trading nations settled their
trade in gold, but they might accept pounds rather than gold, with the
confidence that the Bank of England would hand over the gold at a fixed
exchange rate upon presentment. But by the end of World War II, the US dollar
was given this status by treaty following the Bretton Woods Agreement. As per this, 35 US dollar could be exchanged for an ounce
of gold.
But later on during the Vietnam War
era, USA did not honor their commitments for maintaining a fixed dollar gold
ratio. USA printed big quantity of dollars to finance its wars and over
consumption. USA increased the supply of Dollars much more than the increase in
the production of goods and services, and along with, it consumed much more
than its needs. So USA consumed too much, local and foreign goods which severely
impacted its balance of trade with other countries. Actually these things are still
happening as Governments all over the world have wrong economic notion regarding
stimulating the economy by deficit spending and easy credit. These measures
just drag the future consumption into present and severely hamper the savings
in the economy which are the main building block of future growth.
Hence the volume of outstanding dollars
exceeded the US’s store of gold at $35 per ounce. Countries around the world
who were happily holding dollars in place of gold became concerned about the
Fed’s ability to redeem their Dollar Gold exchange commitment. So they started
redeeming their dollar reserves with Gold from USA and USA found that Gold
reserves had shrunk to 8000 MT in 1970 from 20000 MT in 1958. USA did
devaluation of dollar twice in that period and then finally USA scrapped the
Gold standard in 1971 and Dollar was no longer backed by any sort of Gold.
However Dollar is still global reserve currency and it is still preferred by
global nations to settle their international trade.
Price
of Gold
So Gold is no longer the
global currency but it’s characteristic of best suited money still contribute most
to its current price. Scrapping of Gold standard by every nation
resulted in huge supply of currency money created often by governments to fund
their wasteful expeditions of wars or political milestones through subsidies.
One can imagine the real price of gold if we divide the total gold by all
printed money…it can be 20 times of the current although I haven’t made any
analysis of this.
But Gold is still hold by Governments across
the world as they know that it is the real money which is acceptable to all.
Actually so much money has been printed and created that everybody is running
on the edge of sword which can cut with a small misbalancing force. If
something like that will happen than Gold will still remain the last trusted
commodity to carry out the exchange function.
But Gold or money is not
an investment vehicle or store of value as widely believed. People use their
money or savings to buy gold as it is much more widely accepted and marketable
than anything else in the world. So this store of value function is an outcome
of one great function; the medium of exchange. If we limit ourselves to present times
and to Gold then Gold should be accumulated only because it is the safest money
not for returns. Price of Gold doesn’t increase due to improved performance
like in the case of stocks where demand rises due to better show in the economic
results or real estate where prices rise due to better economic growth and
demand for real estate.
So price of Gold rises because of
natural demand supply function. In fact all prices are a function of demand
supply equation. Price of something is a constant flow which is forced by the
forces of demand and supply. Same thing is true for Gold also….its price rises
when widespread fears about global economy force people to park their money in
Gold. Its price falls when people are optimistic and looking for better
investing avenues like stocks and so they take out the money from Gold and
price falls due to low demand.
But
it should not be the case with Gold. Value of something is relative to our association and satisfaction
of needs but price is not related to Value at all…it is just an outcome of
Demand-Supply equation. Just like water which is valuable but priced low due to
perceived demand supply interplay. But if you are trapped in a hot humid
desert, you can give anything for a bottle of water….but make no mistake here
again the price is related to demand supply not to inherent value.
So Gold is just like water; very valuable as a commodity but
priced very less due to demand supply forces which are taking it just as an
investment vehicle. However Gold is like an insurance policy. It saves and
preserves the value of our money (paper money).
Like during great depression of 1930, People lost their life
savings as the value of money plummeted due to excessive printing of paper currency
by governments. The situation was such that it was easy to burn dollars for
heat than buying a log of wood. Many retired persons lost their savings of
life. Hyperinflation wiped out most people's savings, turning wealthy citizens
into poor ones literally overnight, those who had gold experienced no loss in purchasing power. In
Germany, In January 1919, one ounce of gold traded for 170 marks; by November
1923, that same ounce was worth 87 trillion marks!!!
In
those times, Inflation, due to excessive printing of money and loss of faith by
people in the paper currency, began to grow rapidly, and quickly became a
monster. What's important to us as investors is that the price of gold grew
faster than the rate of monetary inflation. The data reveal that over this
five-year period, the gold price increased 1.8 times more than the
inflation rate.
So I am always a believer of Gold.
I have promised readers of this blog to post a study about
currency wars. So I have written this post as a first step in that direction as
the knowledge about money is the first enlightenment that will make us
understand the complexities of currency wars.
This MONEY has brought great revolution in our life…we took a quantum
jump towards growth and prosperity. The situation here is such that the food i
am eating, the clothes I am wearing…these were not even available to Lord
Krishna. My life is full of comforts. But for Lord Growth is when you don’t
FEAR, when you yearn for your true self, when BRAVERY outshines the Gold, when
you have tears for others. And these are the things which can never be EXCHANGED
or TRADED.
