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I very rarely criticise the work of others, but I am going to make an
exception in the case of Paul van Eeden, of
Cranberry Capital. Mr van Eeden,
in an interview
with The Gold
Report stated
that “the value of gold is about $900 per oz. Expectations of monetary
inflation are keeping gold prices high.” He states that quantitative
easing is not producing the inflation expected. The purpose of this article
is to point out some of the fallacies behind his approach, and in this
respect, Mr van Eeden is
far from alone. And this is where a number of basic errors are committed.
We start with the definition of
value. According to the glossary of von Mises’
Human Action, value is “always relative, subjective and human, never
absolute, objective or divine”. It is reflected in human conduct,
placing value in the same subjective category as fairness and morality. So
all Mr van Eeden is
basically doing is expressing a personal subjective opinion when he talks
about the value of gold. He justifies his belief with a monetary statistic of
his own invention, and compares its growth rate with the rate of increase in
the price of gold. The basic error Mr van Eeden makes here is to believe there is a physical link
between changes in the supply of money and the gold price. For a start, there
is no convertibility between the two, and fiat dollars are intrinsically
worthless, so cannot realistically form the basis of a valid monetary
equation.
The dollar only has value
because the foreign exchange markets and the people that use it assume it has
value, vaguely based on the standing of the issuer. This can change suddenly
and substantially, irrespective of changes of the quantity in circulation:
ask anyone who possessed Icelandic kroner a few years ago. Likewise, gold has
a value that measured in paper money can change suddenly, without a sudden
jump in mine supply, if people simply shift their preferences between gold
and money.
If Mr
van Eeden’s view of value was fundamentally
justified, one would expect foreigners, particularly central banks and over
three billion Asians, to cash in their gold for dollars. Instead they are
keen gold buyers, and we get no explanation why, other than the implication
that they are all wrong and Mr van Eeden is right. Asians are not interested in his views,
or mine for that matter: they know that gold is a better store of wealth in
the long term than any invention of government or the financial markets; and
they know this through experience.
I would also question his
statistics. He constructs something he calls actual money supply, which is
merely the sum of cash and deposits. Inexplicably,
he excludes checking accounts.
All you need to know is that
Austrian, or true money supply in dollars, for which there is a sound
theoretical basis, is 23 times the value of gold said to be held by the US
Treasury. Based on this relationship, my admittedly subjective view is that
at a time of escalating global systemic risk, the dollar is wildly
over-valued relative to gold, and not the other way round.
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