There are a variety of common arguments made against gold’s economic value. Liberal economists believe it is merely a “barbarous relic” from a simpler time. Stockbrokers liken it to a “glorified pet rock” and point out that gold has no yield and often costs money to store. As an example of how far some people will go in an attempt to knock down gold, former Federal Reserve Chairman Ben Bernanke once told U.S. Representative Ron Paul that the reason central banks hold gold as reserves is simply because it is “tradition.”
Under closer scrutiny, none of these arguments hold water as ultimate reasons against gold ownership and its value to the global economy. In response, one of the world-renown experts of the gold market, James Rickards, offers explanations in defense of gold (both as money and as an asset) that directly confront the detractors.
Three Main Arguments
Rickards has been a central banking insider for decades and is highly critical of the overleverage and debt that plagues that financial system. He has written several books extolling the virtues of gold’s economic value and is often interviewed on financial news programs.
Mr. Rickards says that in the course of giving these interviews, he is bombarded by the various anti-gold arguments. He sums them up as three primary arguments:
- There’s not enough gold supply in the world to support the global financial system.
- The supply of gold doesn’t grow fast enough to keep pace with economic growth.
- Gold offers no yield to investors.
One by one, Rickards knocks down these prominent arguments against gold.
Not Enough Supply
Ever since the majority of the world abandoned classical gold standards following World War I, critics have described such standards are too restrictive. There’s not nearly enough gold out there to back up the vast amount of currency in the world, they say.
Essentially, this brings up the greatest fear of central banks: not being allowed to wantonly print more money. Yet, even with that in mind, there’s no validity to the argument that gold can’t support the great expanse of today’s global financial system. It’s not even a matter of how much gold there is to use: all that changes is the price of gold.
For instance, as the money supply grows too big, the price of gold would rise. Theoretically, you could use any tiny amount of gold to back our money; it just depends on how high of a gold price you’re willing to tolerate. Rickards estimates that $10,000 per ounce is a reasonable price if you wanted to support 40% of the value of the financial system with gold.
Slow Supply Growth
When it comes to the gradual growth of the gold supply through mining, Rickards again dismisses this argument as missing the point. It doesn’t matter how quickly—or not quickly enough—the stock of newly mined gold grows. The new supply added each year by mining is but a small fraction of all the gold in the world.
The point is that central banks don’t own all of that gold. If they want to add more gold to their reserves in order to support the money supply, these central banks can simply buy more gold on the open market. According to Rickards, central banks and financial institutions hold about 35,000 metric tonnes of gold, leaving almost 150,000 more tonnes available on the market for them to purchase.
It’s true enough that gold doesn’t bear a yield the way traditional bonds do. However, the U.S. dollar doesn’t have a yield, either. In the simplest terms, gold is money. It’s an investment that possesses unique monetary qualities. Rickards puts it succinctly: “The point simply is that if you want yield, you have to take risk. Physical gold doesn’t offer an official yield, but it doesn’t carry risk. It’s simply a way of preserving wealth.”
You can read Mr. Rickards’ full article explaining his positions here.
The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.