In gold we trust?

Throughout history, when societies and economies implode and currencies lose their value, people have taken refuge in the enduring power of gold.

In the Weimar Republic, when hyper-inflation took root, the exchange rate rose from 7.95 marks to the dollar in January 1919 to 130,000 000,000 in November 1923. Where ordinary Germans held their life-savings in marks they became worthless, and there was a rush to acquire gold, land and other 'real' assets. In the recent Global Financial Crisis, the price of gold started rising in the early 2000s, declined around the peak of the stock market boom in 2008, and shot ahead after the crisis took hold.

In the words of Julius Sumner Miller – why is it so?

Ron Hera of Hera Research LLC has suggested some answers in a paper (dated 26 March 2012) that has been widely posted on investment sites on the internet: 'Value subjectivism and monetary instability'. Hera is an advocate of a position that is common in certain circles in the investment community where there is nostalgic for the days of the 'gold standard'.

Up until the 1930s, when the USA and other countries abandoned the gold standard, countries tied their currencies to the price of gold, in the belief that this would stabilise them. After 1933 countries decoupled their currencies from gold, and were free to vary the price of their currencies as one of the various economic tools at their disposal to achieve their economic policy objectives.

The charge is that the price of currencies has become decoupled from any intrinsic objective standard, and that modern paper money only works at all because governments decree that people have to use them as the media of exchange – they have become 'fiat currencies'.

The advocates of gold are generally conservative in their political orientation, and adherents of the ideas of the American writer Ayn Rand. Ron Hera approvingly refers to Rand's theory of morality, which is based on individuals and groups pursuing their own interests without coercion, which he characterises as an 'objectivist' view, as opposed to the 'subjectivist idea' that reality is what we perceive it to be, and values are whatever we decide they should be.

The gold enthusiasts are also very much drawn to the school of economics known as the 'Austrian School', which included Friedrich Hayek who exerted much influence on Margaret Thatcher, and whose high priest was Ludwig von Mises.

Hera advances 15 specific arguments against the use of paper currencies that are not linked to the price of commodities such as gold:

1. Abstraction- money is an abstraction and fiat currencies have no value

2. Coercion– people would not use fiat currencies unless they were compelled to do so by their governments.

3. Rent seeking – 'fiat currencies extract economic rents by forcing commerce to take place in the fiat currency system.'