The OTHER Problem with Sky-High Gold Prices
No, Donald Trump doesn’t have that many ex-wives (yet).
What I actually had in mind was the distorting effect high gold prices have on economic activity.
That’s in addition to the economic cost associated with skittish, defensive investors shifting a fraction of their liquid assets from “fiat money” (paper) to the supposed safe haven of gold. See, “The Gold Tax.”
Price Signals — and Distortions
First and foremost these days, the price of gold appears to fluctuate in inverse relationship to investors’ confidence in monetary policy.
At a record-breaking $1,800 an ounce (give or take), you can surmise that confidence in fiat money ‘aint great right now.
Or make that some investors’ confidence in fiat money; one of the great conundrums of today’s financial markets is the trillions in outstanding U.S. debt yielding anywhere from 0% to 3%.
But far more important than any symbolic or insurance role gold plays is the tug it exerts on economic activity.
As free market capitalists (I’m one) know, prices act as signals — signals which help organize and direct people’s activities to their highest and best use(s).
Digging Holes in the Ground
So, high prices — and margins — signal profits and opportunity; the opposite, decline.
In a free, functioning system, capital and labor flow towards the former and away from the latter.
According to Economics 101, what happens when gold prices go through the roof?
You get more of it — or at least, more people looking for it.
Given that gold is buried deep in the earth and expensive to extract, that means committing additional billions to, well, digging holes in the ground.
Instead of building bridges, (re)training workers, or curing diseases.
No wonder they call gold “the barbaric relic.”