All That Glitters Isn't Gold, Even Gold - The Potential & Perils of Precious Metals

New Eastern Outlook
Ulson Gunnar
December 4, 2014

In times of socioeconomic turmoil, gold receives renewed interest. It is seen as a means of exchange with enduring value that can transcend the various currencies that generally displace its use during times of economic growth and stability. However, it must be remembered that gold's value is only as good as the markets within which it is traded. If they collapse, gold's value may become highly unpredictable.

For Gold, Perception is Everything 

Much of gold's value is a matter of perception. Gold's enduring value can be owed to the fact that it has been fully integrated into financial systems since ancient times. Its rarity and aesthetic appeal in ancient times, combined with industrial applications today, have helped it keep its place within international financial systems. While gold holds true value as a natural resource, much of its value still stems from perceived value just like many of the currencies it is seen as an alternative to.

The value of gold is only as strong as the system it is a part of. No matter how valuable gold may be perceived within a functioning economic system, should that system collapse, so too will gold's perceived value. Gold cannot be eaten, used as a source of fuel, nor be used for clothing or housing. Without a functioning market to trade it in, its value becomes highly unpredictable.

Whichever markets survive a hypothetical collapse would serve as one possible means to trade gold. Whether those markets are overseas, or built within the system suffering from collapse, gold's value would depend on the ability for these alternatives to transform physical gold into currency or resources required for maintaining a thriving society. Beyond this, amid a crisis gold could be theoretically bartered, though it would be highly impractical compared to the trading of necessities.

Determining the Real Value of Gold 

For those already invested in gold, or contemplating investing in gold, several exercises should be considered. First, determining what real value it has even now, within a functioning economic system. Can it be easily exchanged for its perceived value in currency? How easy is that exchange made and how would it fair in a time of crisis? Is it possible to exchange gold into daily necessities even now, before a crisis? How much harder would it be to exchange it for daily necessities amid a financial collapse?

Second, how easy is it to travel with gold and exchange it in a foreign market? Could gold bought in New York be easily sold in Asia? Do such markets exist? How would they function in a crisis? What medium would one use in a time of crisis? Gold coins? A currency based on gold? Do such markets or currencies exist today?

These two exercises and the questions they raise illustrate that as a personal means of hedging against a financial crisis and more specifically, surviving amid a crisis, gold fairs poorly as an immediate means of exchange. That is not to say that systems couldn't be created to make gold's use as an alternative currency, or at least, one of several alternatives, more viable.

However, if gold investors are able to sell gold today and profit from price increases, and a potential crisis unfolds that is only temporary, gold could at least serve as an excellent means of "storing" value during that crisis. While it may not be easily accessible during the crisis, holding physical gold (for those that can afford to do so) for when a stable financial system is reestablished and gold's perceived value restored, would eliminate obvious risks of keeping a collapsing currency in a compromised financial institution.

Alternatives to the Current Gold Paradigm 

Ultimately, for individuals, creating local or online gold markets and exchanges where the use of gold becomes trivial and its ability to be traded day-to-day as an alternative currency would mean that should say, the US Dollar collapse, a viable alternative currency would already be up and running and people holding physical gold would be well positioned to survive, even thrive during the collapse of the dollar.

Additionally, human survival and indeed progress itself depends on resources. Available resources are the bottom line. An economic system based on resources and their exchange, not the perceived value of a national currency or precious metal, would appear to be a far more sustainable and intuitive economic system. From actual resources all real power is derived.

The possession of forests, oil, seas, minerals, agricultural land, or even highly developed human resources and the ability to organize and exploit them are the primary source of power for any nation, organization or institution. The encouragement of those holding monopolies over these resources for the common individual to instead accumulate otherwise useless currency may go far in explaining the socioeconomic disparity inherent amid the process of increasing globalization.

For individuals, organizations and even nations, the pursuit of actual resources and the means to more efficiently use them provides the greatest hedge of all against financial turmoil on a global scale.

A microcosm of this in action we can observe today are nations currently cut off from globalization due to economic sanctions imposed upon them by those interests at the head of globalism. Nations like Cuba, Iran and North Korea, for example, show us how societies may react to a catastrophic global financial meltdown where everything beyond their sovereign borders effectively disappears and all that is left is what they can devise themselves.

For nations like Cuba and Iran, developing human resources, alternatives to large multinational corporations and their products and services have allowed them to weather sanctions for decades. While these nations are perceived to be behind the socioeconomic curve, should the US Dollar collapse tomorrow and the numerous interdependencies that define globalization unravel, they would be positioned well not only to weather the global fallout, but profit from teaching other struggling nations the lessons they've learned in dealing with socioeconomic isolation.

In summation, while gold certainly has its place and holds value both perceived and as an industrial resource, the only true way to hedge against financial collapse is by preventing it in the first place. And to do this nations, communities and individuals must understand that the development and efficient exploitation of resources is key to both survival and in order for civilization to thrive.

For gold specifically, even if individuals believe its current use is adequate, it could never hurt to create more means of exchanging it via local, national and international markets both in person and online. Just as in nature, diversity in financial markets provide the best chances of survival and the only avenue toward continued evolution.

Ulson Gunnar, a New York-based geopolitical analyst and writer especially for the online magazine “New Eastern Outlook”.