One of the more fascinating trends to arise in the wake of the financial crisis has been the renewed interest of the political right in gold. Today’s New York Times ran a story about the latest part of this trend: Utah has passed a law allowing gold and silver coins to be used as currency. While there is certainly a question of the constitutionality of this law, it’s interesting to think about the arguments and reasoning behind it.
The main idea driving the interest in gold is the fear that the US dollar will eventually collapse. Baring a failure to raise the debt ceiling before August 2nd, the probability of this happening is effectively zero (discussed at end of post). Besides, a collapse of the dollar would lead to a worldwide depression far worse than the Great Depression; I doubt having a form of currency based on a traditionally precious metal will be our greatest concern.
Investing in gold is actually a fairly risky action for a number of reasons. The first is that the price of gold, assuming the current trend of holding it rather than spending it continues, is effectively a function of how quickly it can be mined in South Africa. If the relevant companies mine a lot, the price will go down. If they mine a little, the price will go up. It has little to do with the actual intrinsic value of the metal, which is, if we are honest with ourselves, not that great.
But let us assume that gold does become a normal form of currency. What happens then? Well, as the amount of gold being used for currency increases, one would expect its value to fall. This would mean that any gold you held would be becoming increasingly less valuable. That doesn’t exactly seem like a great investment.
The market, as opposed to the advertisers on TV, is still making it very clear that US Treasury Bonds are the safest investment available. There are no indications from the bond market that investors think the US is facing a debt crisis or that the dollar is at risk. In fact, rates are currently falling, presumably due to both political parties contemplating austerity measures, indicating the investors are worried about more economic stagnation (due to austerity measures).