On November 30th, 2014, Switzerland held three referenda.
Spoilers alert: all of the results were "No".
It's funny I told you the results before I explained what the questions were. One of the proposals demanded the Swiss National Bank to hold at least 20% of its assets in gold, and demand Swiss gold to be returned from New York. 77% were against the proposal; a "yes" result was capable of increasing the gold price by 5%.
The Swiss gold repatriation may have been a reply to similar imminent plans to repatriate the Dutch gold.
The current gold price is about $1,200 per [troy] ounce (0.0311 kg), about 1/3 below the peak above $1,900 per ounce in August 2011. The drop of savings by 1/3 may be unfortunate but the quadrupling of some people's wealth was even more fortunate.
Because of these events, provoking comments by Citi's chief economist Willem Buiter have induced some discussions and responses.
On November 26th, 2014, Buiter would release the Citi research paper
I personally find it bizarre for the Libertarians to be obsessed with gold because – as Buiter correctly says – gold is the ultimate fiat currency, something whose value is derived purely from the objectively unsupported belief of others that it has some value. In this sense, its value has the same logic as the value of the fiat currencies ("fiat" means "let there be" or something like that) except that there are no central banks whose task is to stabilize the gold-to-products price ratios. Because gold has no mechanisms to protect its value, its only stable justifiable price is (close to) zero.
Note that iron ore costs $0.0025 per ounce, well below $1,200 for one ounce of gold LOL.
Some basic numbers. There are 160,000 tons of gold "above the ground". About 50% of it is held as pure reserves, usually in basements in order to discourage thieves, and the other 50% is jewelry. Almost no gold that has ever been obtained (people need to use mercury or cyanide to obtain gold) has decomposed or been lost or gotten rotten ;-) or faded away in similar ways. It's a stable element. But Buiter says that it is a precious metal for the stupid people who watch Saturday Night Fever – kitschy, shiny, in-your-face material for the superficial ones.
It has some technological applications but in (almost?) every single one of them, gold has a competitor that is both (much?) cheaper and better in quality. I do agree with Buiter that if people were completely rational and independently thinking, the gold price would be vastly lower, perhaps 1,000 times lower or even cheaper.
Some gold fanatics – even among people who are otherwise Libertarians – are impressed by the idea that the gold on Earth should "back up" the wealth that exists in all other forms. In the past, when people have pretty much bare buttocks – except for some gold jewelry – it was realistic to say that gold represents about 50% of the mankind's wealth. But today, we have so many other things – so many types and so much stuff from each type of wealth – that gold is really a tiny percentage of the mankind's wealth.
Even with the super-inflated gold prices, those 160,000 tons is equal to 5.14 billion troy ounces. Multiply 5.14 billion by $1,205 (per troy ounce of gold, today's price) and you will get $6.2 trillion. That's the price of all gold the mankind possesses.
Because the world's annual GDP is something like $80 trillion these days, you can see that all existing gold (reserves plus jewelry) is enough for 1 month of GDP – not much more than 1 monthly salary for all the working people in the world. However, the savings and other assets, depending on the type and inclusiveness of the "money supply" or debt that you consider, is comparable to 10 years or more.
Gold can in no way "match" the remaining assets in the world. Even the government of China – which is just 1/6 of the world's economy – has dollar reserves about $4 trillion. They could buy all of the gold reserves in the world plus some gold jewelry for that. And what about the other countries and their reserves? And what about the savings of the individual people and companies that are not parts of the governments?
It makes no sense. A major country can't promise anyone to pay the corresponding amount of gold for banknotes today simply because all the gold that the people possess doesn't have the sufficient value. By far. In advance, people would know that the governments will eventually (quickly) run out of gold, so they would try to get the gold before it is too late (run on banks), and the governments would run out of gold and they would have to break all the promises. Someone who is really enthusiastic about gold could think about artificially increasing the price of gold by a factor of 100 or 1,000 so that it would be sufficient to "back up" everything. But how could you reach such a situation? Aren't the relative prices of products and commodities determined by the invisible hand of the free markets, by the free human beings?
I can't believe that a Libertarian – someone who normally opposes the Big Government – would defend the idea that someone (a league of the world's governments) forces the 7 billion people on Earth to think that the gold is 100 or 1,000 times more valuable than it is otherwise, according to their free opinion. Obviously, a hardcore totalitarian system dwarfing the relatively loose and modest arrangements made by Adolf Hitler and Joseph Stalin would be needed to protect this divorce with the reality.
It couldn't work, anyway, not even with a Gestapo cop in every building on the Earth. During socialism, we've tried almost identical things. We had the Czechoslovak crown which was also extremely valuable. Well, officially. It was worth almost one dollar. Except that you couldn't have bought the dollar – or two dollars – for that nice price. There weren't enough dollars for that. If you needed a dollar, you had to pay those correct market-dictated 30 Czechoslovak crowns for a dollar. The Wechselmen (the not-quite-legal predecessors of exchangers) would get these dollars (or deutschmarks) from the Western tourists for CSK 20 (good enough for the tourists because the tourists would only get a few crowns in the official bank) so they had a cool profit margin. But both prices that the Wechselmen have dealt with were vastly higher than the official exchange rate. The exchange rate didn't mean anything tangible. It was just an empty slogan used by communists to boast that they're on par with (or stronger than) the "imperialists". The reality was very different, however.
The situation with the 1,000 times overpriced gold would be totally analogous. Governments could claim that one ounce of gold is worth $1 million or something insanely high. Formally, that would be equivalent to 100 new cars or 10 new houses. Except that no one would give you those cars and houses for this small amount of gold. Everyone would be selling their gold for the price substantially higher than those $1,200 which may be a reasonably agreeable price. There would be so much trading that people would be very aware of the actual price of gold. The government could try to execute anyone who would only suggest that the price of gold is much lower than $1 million per ounce. But even that would fail to be enough to impose this drastic distortion because the executed people were not special in any way: they just saw what everyone else may see, too.
You just can't establish a sustainable arrangement in which the value of gold is comparable to the value of everything else combined. Gold is a very small percentage of the mankind's wealth. And that's true even though the price of gold is hugely inflated – in the state of a bubble that has lasted for thousands of years.
Another myth that the gold fanatics love to believe is that precious metals such as gold and silver – which can't be too bad; they understand that if gold is such a wonderful measure of assets, silver can't be much less accurate because it's also kind of precious – have prices that are not being distorted by the government, and their price ratio must therefore be constant.
It is of course bullšit. The graph above shows that the gold-to-silver price ratio went above 100 in the 1940s – but by 1970 or so, it returned to 15, the same level where it spent several centuries up to 1870 or so (gold and silver were used as coins during those centuries which is why the price was so constant). The point is that the fluctuating price of gold isn't a consequence of government interventions. The prices fluctuate mostly for natural reasons. No one knows what the right price of a pretty useless metal should be. The price may be changed by some good or bad publicity, theft, new ways to mine gold, fear, and for many other causes.
In a 30-year period, the gold-to-silver price ratio may easily change by a factor of 6 – up or down. The metals are in no way more stable than other things. Modern fiat currencies guarantee the promised inflation rate plus minus one percent in a year. So in 30 years, your predictions about the price of a "basket" of products will deviate at most by 30 percent – not by 500 percent which is the error you would get if you estimated the price of gold in terms of ounces of silver between 1940 and 1970.
Buiter has been saying similar things for years. But there are new memes in his 2014 report, especially the comparison between gold and Bitcoin. He says that gold and Bitcoin are extremely similar when it comes to the logic that determines their prices. Meritocratically, the prices of both things would be near zero. But the real value is much higher because people see other people who say that it's much higher and it should cover a substantial fraction of the human wealth. In both cases, one has to spend extreme resources to "produce" new gold (mining and chemical processes involving mercury or cyanide) or new Bitcoins (CPU power needed to perform otherwise useless calculations). In both cases, the resources could be used to produce something much more valuable when it comes to the intrinsic value.
If you want a practical payment system, you want the prices of average things expressed in this currency unit to be predictable (essentially stable, or with a pre-declared inflation rate). This predictability is the reason why people aren't afraid of storing their wealth in this form; or of creating debt by borrowing; and that's why the stable money is being used for economically beneficial transactions at various time scales. No particular commodity or product such as gold has this property – the relative prices fluctuate greatly.
(If you tried to make coins [a small percentage of money supply] of gold or silver again, people would know whether the coins are more valuable or less valuable than the declared value. If or when they were more valuable, they would melt them and sell the material. If they were less valuable, then the metals wouldn't really "back" the fiat currency, anyway. A tail can't wag the dog.)
The modern fiat money are the best devices for a predictable preservation of wealth and debt. And there should be some policies that preserve some stability or equilibrium – that the people never feel the urge to horde or, on the contrary, to hysterically get rid of the currency. The existing inflation targets and similar things are imperfect and I can tell you more conceptual ways to improve them – but they are essentially right to optimize the economy, much more right than a new gold standard could be. The more accurately and explicitly the rules for the "price of money" are written down and automatically enforced, the smaller role the central banks or governments play. A central bank that just does what is needed to keep an inflation (or nominal GDP...) figure at the right value is de facto exerting no power at all, and it is the ideal that Libertarians should logically embrace. A government that needs to distort the gold-to-car price ratio for it to swing to vastly different values than what the people would normally determine via the market is something that the Libertarians should hate. And a system without a widely used currency that is stable enough and that people are willing to use in both directions is totally impractical because it forces the people to barter if they want to be safe, and the economic activity logically suffers.
In the long run, if the mankind gets wealthier and/or more rational, it is obvious that the price of gold will decrease – gold is going to be a vastly worse investment than stocks, as e.g. Warren Buffett has repeatedly explained.
Dow Jones index divided by gold price, in $ per troy ounce. There was a drop from 40 in 2000 to 10 a few years ago but now it's back to 15 (not shown). The increasing oscillations are weird. But one can arguably see some long-term growth, anyway: stocks are a better investment. My understanding is that the DJIA index is defined so that it drops when a stock goes off-dividend, so the graph above (just like the Dow Jones graph in dollars) doesn't contain the dividend profits and hugely understates how good an investment stocks are.
Some critics of Buiter's have argued that the drop in the gold price (by 35 percent) has been much less severe than e.g. the drop in the price of the Citibank stocks (by 95+ percent). That's a cute form of criticism (Buiter is from Citi) but an unfair one, too. No one has ever claimed that the Citibank stocks are safer, more stable, or more practical "banknotes" to use to store wealth and debt. It's just one volatile company so the fluctuations may be and have been intense. But a portfolio of many stocks does better than gold in almost every decade and in every century. And modern fiat currencies are more stable in the short and medium run.
By the way, the Swiss referendum proposal wanted to restrict the Swiss National Bank's ability to sell gold. In effect, some of its gold could never been sold. It's funny to ask whether such a regulation increases or decreases the price of gold. When it comes to the world markets, the price would surely go up because the traders would know about an institution that has switched to the mode of "mindlessly hording" gold. This decision of course increases the global demand. On the other hand, if one owns gold (or anything) that he can't ever sell, it's totally useless. It's just like splashing the gold into the toilet or sending it outside the Solar Systems with a spaceship. Normally, the savings are being saved because they may be used at some point in the future! So from the Swiss national viewpoint, the price of that gold should really be counted as zero as long as the laws (resulting from the – fortunately rejected – referendum) are respected. ;-)
The different results for the "price of gold" that we got by these two methods represent a classic example of the government-led distortion of the prices and markets. When someone is barred from buying or selling certain things, different prices – official ones and the true, black-market ones – are always created and start to diverge. And it's a bad thing.