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Thread: A major flaw in Gold ?

  1. #1

    Default A major flaw in Gold ?

    Currently I am reading a very good book about the gold investment and goldstandard ("Freiheit durch Gold" for every german reader). I've always been a very big supporter for the 100% goldstandard but as I am reading this book there's one big flaw that comes to my mind.

    Image if we would establishe the goldstandard. Gold and Silver prices would rise to the rooftop etc. all the stuff we know.
    But wouldn't this system contribute just another manipulation possibility?
    So if we would have an established gold standard the smartest thing to do would be to buy as much gold as you can. You buy it and keep it. During the time the goldprice would rise even more because of the shortage of gold.
    And at some point you could sell all your goldreserves for a much higher price. So then the price would drop significantly. You could do this over and over again. Wouldn't this ruin the free market ?

    It's just an idea. I hope you can proof me wrong.



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  3. #2

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    Quote Originally Posted by Rylick View Post
    Currently I am reading a very good book about the gold investment and goldstandard ("Freiheit durch Gold" for every german reader). I've always been a very big supporter for the 100% goldstandard but as I am reading this book there's one big flaw that comes to my mind.

    Image if we would establishe the goldstandard. Gold and Silver prices would rise to the rooftop etc. all the stuff we know.
    But wouldn't this system contribute just another manipulation possibility?
    So if we would have an established gold standard the smartest thing to do would be to buy as much gold as you can. You buy it and keep it. During the time the goldprice would rise even more because of the shortage of gold.
    And at some point you could sell all your goldreserves for a much higher price. So then the price would drop significantly. You could do this over and over again. Wouldn't this ruin the free market ?

    It's just an idea. I hope you can proof me wrong.
    It wouldn't work. As you buy up the gold, the price goes up as you mentioned. If you try to dump all of the gold at once, the price will gap down as you fill all bids, and then suddenly you have a bunch of gold for sale with no bids, meaning someone will come along and get it all basically for free.

    Not a good idea.

    You could do something like this in a situation where the market is far larger than you, but then you wouldn't have any control over the price (ie it isn't guaranteed to rise as you buy more and more). If you are very large compared to the other market players, then you will just wipe out all the bids when you dump it all.

    Basically, you can't sell any more than the amount that people want at the current price. If you try, the price will fall, and it may fall to zero if there isn't a pool of low bids sitting out there.

  4. #3

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    Quote Originally Posted by tmosley View Post
    It wouldn't work. As you buy up the gold, the price goes up as you mentioned. If you try to dump all of the gold at once, the price will gap down as you fill all bids, and then suddenly you have a bunch of gold for sale with no bids, meaning someone will come along and get it all basically for free.

    Not a good idea.

    You could do something like this in a situation where the market is far larger than you, but then you wouldn't have any control over the price (ie it isn't guaranteed to rise as you buy more and more). If you are very large compared to the other market players, then you will just wipe out all the bids when you dump it all.

    Basically, you can't sell any more than the amount that people want at the current price. If you try, the price will fall, and it may fall to zero if there isn't a pool of low bids sitting out there.
    Well thank you. This is pretty logical. I think I'm still to much into the paper economy thinking way

  5. #4

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    Quote Originally Posted by Rylick View Post
    Well thank you. This is pretty logical. I think I'm still to much into the paper economy thinking way
    With all the disinformation out there, it's easy to understand why people would question the logic of a gold standard.

    Of course, a gold standard is not perfect. Competing currencies is the ideal solution.

  6. #5

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    Any currency that is set arbitrarily by some government body is bad, even gold. The ideal would just let it come about naturally through market forces. Then, whenever the current currency starts going bad, market forces will already be at work bringing about the next good one. Market forces will also make sure that money is worth the 'correct' amount.

    Just let the market work. The best will naturally rise to the surface.
    "Anarchists oppose the State because it has its very being in such aggression, namely, the expropriation of private property through taxation, the coercive exclusion of other providers of defense service from its territory, and all of the other depredations and coercions that are built upon these twin foci of invasions of individual rights." -Murray Rothbard

  7. #6

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    Quote Originally Posted by Rylick View Post
    Currently I am reading a very good book about the gold investment and goldstandard ("Freiheit durch Gold" for every german reader). I've always been a very big supporter for the 100% goldstandard but as I am reading this book there's one big flaw that comes to my mind.

    Image if we would establishe the goldstandard. Gold and Silver prices would rise to the rooftop etc. all the stuff we know.
    But wouldn't this system contribute just another manipulation possibility?
    So if we would have an established gold standard the smartest thing to do would be to buy as much gold as you can. You buy it and keep it. During the time the goldprice would rise even more because of the shortage of gold.
    And at some point you could sell all your goldreserves for a much higher price. So then the price would drop significantly. You could do this over and over again. Wouldn't this ruin the free market ?

    It's just an idea. I hope you can proof me wrong.
    *edit*
    Let me preface that I didn't thoroughly read your post and thought you were talking about gold as money. I thought you were talking about gold hoarding, which is a common argument of why gold as money can't work.


    So below is an argument against the "gold hoarders owning the market" argument.

    But first, how do you expect someone to buy and sell their gold if gold is the standard of money? You mean paper notes for gold, and you exchange them for gold? How do you sell the gold then, don't you get paper notes back? Can you really alter the market price for gold by exchanging your gold notes for gold by the ton? Yes, if there is a shortage of gold, the price for things in gold goes down, but gold IS the price. Your gold doesn't change when you exchange it back for paper notes. The note is still measured as an exact weight of gold. The dollar is legally defined as equal to a particular weight of gold. That weight does not change for the note.
    -----

    Imagine if we had gold the whole time and world production of goods and services rises while the supply of gold remains relatively constant. We would have constant deflation instead of inflation. The gold your grandmother put into savings could buy a lot more today than it did back then.

    Yes. The price for everything relative to gold would have to fall to meet that level if gold became money again.

    Hoarding is a poor word. What does hoarding mean? If I have gold and do not spend it, am I hoarding, or saving? If it's never spent, never invested, but remains locked away in a vault forever, then it's hoarding. But even then, so what? It's no different than a man throwing away his earnings. It's a store of value which is never redeemed.

    So one who keeps the gold for a particular purpose is saving. But can you save so much gold to affect the market significantly? Can a man work so hard as to, by his own labor, save up so much gold as to hurt the market? Can a hundred do this, by their own labor? A thousand? I don't think so.

    It's not like a rich man can just go about stealing more gold. Gold is earned through production, and if only by your own labor, it will not be significant. The best way to earn more then is to find a way to invest (read: SPEND, RELEASE INTO THE MARKET PLACE) your savings in a promising business. And then you're definitely not hoarding, and the sum you saved and then spent is back in the market, not creating a shortage of money to further deflate prices.

    There are times to spend, invest, and times to save. There won't be any real hoarding. Prices will always fall when production is up. When production slows and prices start rising, investment happens, because it's the best time to buy.

    And what if your "hoarder" is lending? Well, that is a sale of goods. The price is just the interest rate. There will be a balance between investment and lending. A loan that does not produce a profit for the borrower is bad for both the lender and the borrower, as the borrower did not have the money in the first place, it must come out of future savings instead of new production, if he can pay the balance at all. And if the lender's "hoarding" of gold is so great that the borrower loses a significant portion of his current income and does not find success in the venture he took a loan out for, guess who loses? The lender, if the borrower cannot repay.

    The return on investment will generally be better for production than for lending, although a bit riskier. But a bankruptcy on a loan will cost the lender the same as malinvestment.

    But no matter how much money the big guys save, it has the same effect on their wealth as it does the rest of the people, enriching them. Yes, prices drop, but would you seriously call that manipulation? Everyone who saves enjoys the benefit of cheaper goods and services. The people who do well are those who save, and those that take on unproductive debt suffer the price of paying back on a slowly falling income.

    What we have is exactly the opposite. With perpetual inflation, it snowballs in the other direction, robbing value from the pockets of the people and giving it to big players that handle it first. The unproductive borrower is slowly bailed out by inflation and rising income and the saver watches his store of wealth diminish in value.

    In short, I find no reason for any sane, logical person to truly hoard gold. And a fool and his money will always part ways. So who is left to hoard gold? Who will not use it to spend on pleasure or invest in business? Who will bury it and never use it?
    Last edited by enjerth; 05-14-2010 at 03:24 PM.

  8. #7

    Default

    the only way to really "manipulate" a gold standard is in the very beginning of re-implementing it--if you have advanced knowledge that it's going to be put back into place, you can purchase significant amounts beforehand at a really low price (the value of gold would skyrocket once it officially became money)--this would mean those who "hoarded" gold in advance of this would end up having way more purchasing power....but really, this would only be in the beginning, and wouldn't last long at all---and it's not really "manipulation" either--just wisdom.

  9. #8

    Default

    If you have a hard gold standard, meaning gold IS money, what would you buy gold with? You can earn money and save it, you can exchange it for goods and sell goods back in exchange for money- gold. So manipulating gold price is kind of impossible. You can manupulate some asset price in gold. That's true. But that's true with any money. I'd even argue that with gold as money it's much harder to manupulate any asset price since you can not print gold






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