Gold-as-money, Part II

If gold is the mortal enemy of central bankers, as suggested by Lawrence Parks, executive director of the Foundation for the Advancement of Monetary Education (FAME), is there hope for a truce or a peace accord in the years ahead? Parks says no. Gold producers and central bankers will never be able to play nicely with one another, he explains, because their interests are “in irreconcilable conflict.”

As mentioned in this space a week ago, Parks believes the world’s bankers are attempting “to denigrate and destroy” gold and the gold producers because they want to protect “fiat-funny money” (paper money they create out of thin air) from its strongest competition — gold-as-money. Plenty of gold bugs share this view, but with prices stuck well below US$300 per oz., they can do little but fume when gold is described as “the spent fuel of an obsolete monetary system.”

The producers aren’t fighting back either, Parks says, and most don’t even realize they are under siege. “While gold as money has always been — and would be again — the choice of free markets and free people, the central bankers are winning the competition because of coercion, misrepresentation, and non-disclosure.”

Setting aside the debate about whether central banks are waging an undeclared war on gold, there is no disputing the notion that gold-as-money has fallen out of favour, particularly given the strong U.S. dollar. Current gold prices clearly reflect this shift in sentiment. Parks warns that if present trends continue, “in five years the industry may well be a memory; the mines closed, the employees out of work; and their shareholders wiped out.”

While this scenario may seem melodramatic, gold producers and their industry associations do recognize that a serious problem exists. They’ve responded with a variety of strategies, including an engineering response and the gold-as-jewelry strategy.

Parks doesn’t think much of either approach. He acknowledges that the producers have been extremely innovative in cutting costs and finding new and better deposits. “But despite their superb technological and prospecting achievements,” he notes, “they have not been rewarded, and neither have their shareholders.” No argument there.

Parks also believes that the amount of gold fabricated into jewelry is a contrary indicator of the well-being of gold producers. “More gold fabricated into jewelry corresponds with a lower price for gold, lower profits for gold producers, and a lower market capitalization of their companies.”

Jewelry is a low-value, marginal use for gold, Parks says. He points to 14 years of data indicating that whenever the price of gold decreased, jewelry off-take increased, and vice versa. “Mindful of this evidence,” he writes, “why does anyone believe that further increases in jewelry off-take will reverse a relationship that has held for almost two decades?”

What’s more, Parks believes that promoting jewelry fabrication has alienated institutional investors. It also imperils producers, he adds, because it gives credibility to enviro-extremists who argue that producers are ravaging Mother Earth to get something that isn’t really needed.

Marketing gold doesn’t make sense either, Parks argues. “What good is increased demand at lower and lower prices? What good are new markets that are unprofitable to producers? One is reminded of the manufacturer who loses money on every unit sold but hopes to make up the loss by increasing his volume.”

Parks believes the industry should focus on what will increase the price of gold. And gold’s real value, he emphasizes, is as a bet against currencies. “At the end of the day, to revive the fortunes of the gold producers, it is necessary and sufficient to restore gold as the choice of free markets and free people all over the world as money that doesn’t appreciate at home or abroad; as money that is steady as the stars; as money that is as faithful as the tides.”

To get the ball rolling, Parks would like to see the World Gold Council do more to get rid of laws and regulations that inhibit the free use of gold, including legal tender laws. And he wants the International Monetary Fund to drop a restriction prohibiting member countries from linking their currencies to gold.

As for producers, Parks believes they should do the following: finance operations by issuing gold-backed bonds; give shareholders an option to receive dividends in gold coins; give employees and suppliers the option of payment in gold coins; help educate the public about the benefits of gold-as-money and the pitfalls of fiat money; and work with support organizations to restore honest monetary weights and measures.

We don’t want to be pessimists, but all of this is a tall order for a society in the midst of national obsession with high-flying stocks and sophisticated cyber-financial instruments. We can just imagine the sniffs of disdain. Gold coins? Pshaw!

It’s our feeling that the paper tide has to go out before the gold tide can come in again.