Guest Post: Gold, The Improbable Answer To Life, The Universe, And Everything

Tyler Durden's picture

Submitted by Bo Peng

Gold, The Improbable Answer To Life, The Universe, And Everything

"Alright," said the computer and settled into silence again. The two men fidgeted. The tension was unbearable.
"You're really not going to like it," observed Deep Thought.
"Tell us!"
"Alright," said Deep Thought. "The Answer to the Great Question..."
"Of Life, the Universe and Everything..." said Deep Thought.
"Is..." said Deep Thought, and paused.
"Forty-two," said Deep Thought, with infinite majesty and calm.

-- Hitchhiker's Guide To The Galaxy, Douglas Adams.

(With apologies to Mr. Adams, may he rest in peace, I never get tired of quoting H2G2.)

There's no rational basis for valuing gold in terms of anything else.
Unlike all other widely traded metals, gold has relatively little
inherent value and its above-ground quantity never decreases because,
well, gold is forever (while diamonds burn up).
These (little inherent value, inert) plus the relative rarity make
gold a very good medium for trade, i.e., money. The ideal medium for
trade is something that

A. has 0 inherent value and
B. can never be created and
C. can never be destroyed.

Since human stupidity is hard to measure or divide into smaller chunks, gold will have to do.

It's worth noting that digitized fiat currencies of today meet two of
the three requirements 100%. If we find a way to make it hard to create,
it would be a better choice than gold. Independent central banks were
created specifically to make it harder to create fiat currency. But the
game nature of human society dictates that every system will be
corrupted, and every good idea turned bad, over time. As such, the
central-bank experiment, while brilliant and noble, has come to an
abrupt end in failure since the 08 crisis. Global fiat currency system
was an ingenious and bold experiment except for its reliance on an
optimistic view of human's ability to overcome greed and fear. Soft
inhibition/prohibition against the creation of money, be it moral,
legal, or political, is not enough to prevent us from caving in to greed
and fear when the time is right (or wrong). We need something stronger
to save us from ourselves. Back to gold.

It is no accident
that the dollar started its slide and gold its rise both around early
2002. The terrorist attacks of 9/11 alerted the world to the
unthinkable, the possibility that all the powers of US could not
provide protection against the new type of threats. The ensuing domestic
and international policies of the Bush administration tirelessly
proved this right. Perhaps more importantly, the Bush administration
showed the world that, lacking the ability to generate organic growth
and wealth, the US is perfectly willing to abuse the trust the world
had bestowed upon it, by making the dollar the global reserve currency,
in order to fund a war without fronts, borders, goals, endings, or
clearly definable enemies. Obama strangled any budding audacity of hope
by resolutely wasting the best historical opportunity for
financial/economic/regulatory/legal reform in generations, allowing
himself to be bullied around and weakened in the process.

Somewhere along the process, however, the Perverse Gold has become more
than the dollar hedge. It gradually dawned upon the world that we're
faced with a paradox:

A. The dollar cannot serve as the global reserve currency, and
B. There's no alternative to the dollar as the global reserve currency.

How to get out of this Catch 42, nobody knows, although creative/crazy
ideas abound. Gold is most definitely not the answer, at least not in
the old style of gold-backed currencies. But when everything else proves
even uglier, the original ugly begins to look better and better. I
still don't believe we'll go back to the old gold standard but it's the least improbable among the improbables. And, with the Infinite Improbability Drive technology owned by the Fed, it's becoming less and less improbable.

Since 2002, gold has used every pathetic excuse to go up. When the
dollar is weak, it's a dollar hedge; when the dollar is strong, it's the
euro hedge; when crisis hits, it's the safe harbor; when the economy
is good, it's the inflation hedge. Now central banks are no longer
ashamed of hoarding gold. Various countries and localities are talking
about using gold to settle trades, e.g., India, Commonwealth of Virginia (yes, gold, Virginia).

A notable exception is 2008. But it was not because people liked cash
more than gold, it was because people needed cash to unwind their
positions just to get through the day. And in various scenarios some
fiat currencies may be considered temporary safe heaven. But the
candidate pool is shrinking and the safety duration is shortening.

I profess zero love for gold; it doesn't hug me back. But as far as
sustaining the things that do, gold is a necessary evil, the most benign
evil at this point in time. I always liked Virginia; if they actually
pass the alternate-currency law, I would be very tempted to move there,
if only for the cool factor and the clean conscience knowing my
children's future wouldn't be volunteered to keep some irresponsible
bums on their spending high. My children hug me back and I'd like to
keep it that way.

When you're on the right side of a macro
trend, supposedly random events inexplicably go right with improbably
high probability. I can live with such blatant disregard of nice
mathematical properties. What I cannot live with is the lack of
understanding when the trade may end. There're many ways the gold trade
may end, but valuation is not one of them (though valuation may cause
temporary pull-backs once in awhile). As I said in the beginning,
there's simply no rational basis for gold valuation in anything else.
It is, quite simply, whatever value the market is willing to pay for.

So, until the world figures out what the next common medium for trade
is, gold is the temporary universal answer to Life, the Universe, and
Everything. It is the question that you need to figure out for yourself.