Is Gold Just Another Fiat Currency?

Below is a clip from Sky News which demonstrates that a Gold Rush is developing in China, with many now distrustful of fiat currencies. China is now the number one consumer of gold. But all across the world, we are witnessing the same currency revulsion and distrust of central banks, which has buoyed the price of gold.

Nevertheless, the video does point to a certain mania amongst investors that sounds more like speculation and risk seeking than investing and risk aversion. Witness the Chinese man quoted saying, "I think investing in gold bullion is very good. Recently, the price of gold has been increasing all the time and I think it will rise even more." That is exactly the psychology we witnessed in Emerging Markets shares in the mid-1990s, in Internet stocks in the late 1990s and in housing in the 2000s.

In this week’s Barron’s, Richard Wiggins, chief investment strategist for First Michigan Bank, says that gold is just another fiat currency.

He says:

A vital observation of the fun-starved Austrian school of economics is that investors err together, so unanimity of opinion is a danger sign. In past decades there has always an overvalued sector-a steaming corner of the market where money was converging — and outperformance has come from getting out ahead of the crowd.

– In the 1950s, avoid electronics.

– In the 1960s, avoid franchise restaurants.

– In the 1970s, avoid the Nifty Fifty and fixed income.

– In the 1980s, avoid energy and biotech.

– In the 1990s, avoid Japan and the Internet.

– In the 2000s, avoid real estate and home-building.

All bubbles have nearly identical characteristics. The second half of the 1970s witnessed the outperformance of energy issues. At $30 barrel, oil companies were clearly in fat city. But the gonzo run-up in oil prices that propelled this sector in 1982 contained the seeds for an eventual glut that eventually sent it right back down.

Similarly, gold, which was outside the pale of serious discussion in the 1970s at $35 an ounce, entered the investment mainstream at $600 and $700 an ounce between 1978 and 1980, when it was quadrupling.

Only 15% of gold is used as a monetary metal; the rest of it is used as a commercial metal, and that use, particularly as a corrosion-resistant electrical conductor for semiconductors, is declining. Regrettably, it is a soft, semi-useless metal with very few industrial applications.

Gold is just another fiat currency. The only reason gold is valuable is that we believe it is valuable. Ultimately, this gold bubble ends in tears. When and how far gold’s price will decline is anyone’s guess, but a smart bet is "sooner rather than later."

Is gold just another fiat currency? Is Wiggins right that this is a bubble forming?  George Soros seems to think a bubble has formed.  But for now, the price of gold is rising. And as central banks turn to the printing presses to fight deflationary forces, I believe it will rise much further still.

Source

Gold: The Ultimate Fiat Currency – Barron’s

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