The True Prices of Gold
Ol' Remus

I've struggled to understand why people ascribe so much value to the metal. Apart from jewellery, it has virtually no use. Gold is only valuable because people say it's valuable. What's more, I'm not keen on assets that never pay an income. - Ed Bowsher at moneyweek.com

It's an old question, why is gold money? Why, in every society, ancient and modern, is gold the default store of wealth? Who are these apparently omnipotent people who say it's valuable and make it stick? And if gold is the "safety" everybody flees to in troubled times, why do so many insiders insist its price is to too low?

One entirely reasonable proposition about the price of gold says its "true" price would be discovered through the market if it were unencumbered by fraudulent manipulation. This is almost certainly correct, or at least true by definition, but it draws too small a circle. There is a another "true" price of gold, one outside the commodity market, as FOFOA points out in his article, Think like a Giant 3:

Once you had built up a stash consisting of, say, hundreds of tonnes, which probably took generations to accumulate, it would suddenly have a much greater value than the market price said it was worth. It would kind of be the inverse of this: "It is to say" your wealth isn't as great as your currency says it is"!" In this case, it would be to say "your wealth is far greater than your currency says it is."

and,

There truly is a "Giants' circuit" that has always been isolated from the rest of the marketplace. When you're a Giant, and you buy Giant stores-of-value, your marketplace truly consists only of other Giants. They, as a whole, are the future counterparty you count on should you, or your progeny, ever have to dishoard. You can't, and therefore don't, count on the rest of the marketplace. - FOFOA at fofoa.blogspot.com

FOFOA seems to say the "true" value of gold relies on the multi-generational accumulators, not Big money but the Biggest money, the class of wealth that buys works of art at multi-million dollar prices, or rare gems and antiques at auction, and have gold holdings reckoned in hundreds of tons and more. They're in a different league than any gold market that reckons in terms of ounces. Even with the recent ramp up, the entire output of world mining is three thousand tons per year, only as much as the output of the 1848 California gold rush in its first year. Almost all gold prior to World War II went directly from the mines into the monetary system, a large part of which migrated to the Giants. And there, even with the FDR confiscation of 1933, much of it stays.

Those who FOFOA calls the Giants don't participate in the retail gold market, to them it's a onsey-twosey swapmeet, there simply isn't enough available to buy, and it's too small to equitably absorb the lots they sell. Said differently, gold's artificial price comes in part from the lack of participation by the customers who could set a price with real authority, the super-rich.

Periodic buying or selling such lots in the open market would instantly distort the price with each transaction, creating ridiculous swings up and down. "New money" does participate however, especially new money looking for a place to hide, one place the sales in tens of thousands of ounces come from. The Giants have only one market for the quantities they move around: each other. This, he says, sets the other "true" price of gold, called the "In Size" price, estimated to be as high as twenty times the market price. He goes on to say there is no conspiracy involved, just simple privacy.

FOFOA speculates about the price of gold should it be again monetized by central banks. The Giants aren't about to have the value of their key holding set by the "discount" commodity market or the so-called "jewelry" conduit to the Third World. Private hoards, now sold discreetly "In Size", may set the future central bank price, and that price may leak downwards. These notions seem like convoluted nonsense to those of us whose experience is classic economics at the producer-consumer level. Should gold be remonetized, expect to see news articles about a "flight to safety" and consequent upward pressure on the price of gold. It would be true, but only as far as it goes.

For those with a stash of gold coins to see them through a currency collapse all this is irrelevant chatter. Gold in "stacker" amounts would continue to obey the simplest form of valuation, it would be worth what another person would trade for it. Maybe an industrial park, maybe a pint of heavy cream, only the future knows. What we do know is the market price of gold is perilously close to the cost of production. How can this be, given the supposed demand? FOFOA, as always, will explain.

Condensing FOFOA is risky, the reader is right to suspect oversimplification or misunderstanding, so beware of any "interpretation", including this one. Read the source material for yourself, or take up something more understandable. Computational Fluid Dynamics, say.

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