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Gold: An Objective Look at Subjective Vaue - Part 1

Gold is no longer the four-letter dirty word of years past. People see it with a mixture of unbelief, curiosity, greed and emotional animation. Yet, despite its five-fold increase in price in a decade, not to speak of the amount of press it has received, it is, in my view, largely misunderstood by most observers and participants alike.

Those who own gold are often torn as to when to sell it to capture the unrealized profit. Those who do not own it, agonize on whether they should buy it at this price, or when they should buy and what they should pay for it. The problem is that the value of gold does not neatly fit within the customary valuation models of our day. This is part of the reason for the cynicism it has attracted.

This article sponsored by Gold Money

Agnostic as I may be about the price of gold, and unable to prognosticate or give you hints of advice about whether you should own some or not, I propose to share my own subjective views on its meaning.

The rising price for gold (and silver for that matter) is not the answer to any of the ills that burden our world, but only a symbol of the flight from dishonesty. Such symbolism possesses important clues with respect to capital and its role in economic life.

There is no argument in that we live in dismal times. The subprime crisis was merely the prelude of the financial chaos that has ensued. Yet, it is not the consequences of such financial crises that matter as much as the recognition that we are suffering from a deeply-rooted moral crisis.

The subject may be scholarly, but its impact affects us all. I point you to Guido Hülsmann’s The Ethics of Money Production as a primer on the genesis of our global ailment.

From a capital owner’s perspective, this moral crisis has considerable implications since its economic consequences arise from a larger framework of structural malaise. Four such characteristics are pertinent: fraud, illiteracy, lawlessness and poverty.

Fraud defines every aspect of our modern life. From government to finance, to family, to accounting, law, medicine, to the church and from the highest officials in the land to the lowliest day-laborer, fraud characterizes our human interactions today more than in other periods in history. Madoff’s fraud pales into insignificance when viewed against the intellectual fraud that causes far greater damage. But we seem to accept it. Fraud is tolerated, expected and in fact, generally rewarded. In contrast, trust, that human condition that binds families, communities and builds societies, has just about vanished.

Illiteracy is also a trait of our age. Even at a time of portable computers, instant communication, fancy cell phones and the miracle of the Internet, and even when surrounded with more infor- mation than any of our ancestors ever dreamed of, we as a society remain in utter darkness. Compared to our ancestors, we are intellectually bereft. We know nothing of our own history, of money or capital. We see money and credit as the source of wealth. We embrace financial engineering while being uninterested in or ignorant about its economic impact. We embrace the idea of wealth without work and even demand it. We buy other people’s debts, and we call them assets. We demand real goods and plentiful credit to pay for them. We look at rising asset prices and reckon them to be wealth. We vote idiots into high office. We hail economic growth, as measured by GDP and by the clipped coins of our times, and hail it as progress. We are a society of idiots.

Even more so, lawlessness is the third characteristic. The law has become distorted, ambiguous, uncertain and subject to the whim of the ruling elites. In the name of security or by reason of the abominable idea of social justice, the sanctity of property, the sanctity of contract and the rule of law have been seized.

And finally, poverty. We have an abundance of money and credit but a shortage of capital. We have sought to substitute form over substance, credit over savings and consumption over production. We have eaten our capital. As a result, both current and subsequent generations will fail to match their parents’ economic standing.

Yes, we live in dismal times and we suffer from a moral crisis, both being consequences of a 40-year old experiment in dishonest money.

Again, from the perspective of a capital owner — us, the issues are daunting and very real.

Dishonest money not only destroys capital, the saver and the economic calculation of entrepreneurs. It chiefly destroys the soul of a society. It begets a dishonest understanding of risk, which begets dishonest accounting, dishonest objectives, dishonest business endeavors, dishonest securities, a dishonest financial system and ultimately, a dishonest managerial class.

Under these circumstances, I propose to you that the idea of finding value or of valuing assets becomes unimaginably difficult. The use of standard metrics in valuation is fraught with falsehood. And so, the notion of value becomes polysemantic and detached from the orthodoxy of modern finance.

If we are to address honestly the financial implications our moral crisis, we must begin to think differently. To say that we wish to preserve our capital is, at best, very difficult. It requires that we find honesty and permanence. It requires that we extract ourselves from the very system to which we are tethered, and that we look at capital very differently. It requires that we become utterly distrustful. It demands that we think outside of the metrics used by our contemporaries and outside the jargon of finance that is used to sustain the ignorance and stupidity of our times.

If you insist on asking how high the price of gold might go or whether you should buy or sell, my only answer is that you have the wrong question. The price of gold in money cannot be calculated with the formulas of financial analysis. What is the price of something when measuring it with something whose quantity is purposefully dishonest?

Mr. Bernanke is willfully trying to debase the dollar. He will succeed. His colleagues at the ECB purport to be against such measures. This will not last long for they, too, will resort to coin clipping. They too will fail. Today is Greece and Ireland. Tomorrow is Spain. Next month is Britain, France and a host of others. The following month is China, Japan, America and so forth. It may take years, but the whole culture of credit and debt will fail. This is reality. We just do not know how or when.

Read part 2 of 'Gold: An objective look at subjective value'

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