Gold fundamentals

Now that gold is in correction mode - though it could easily test and surpass the highs (nobody knows) - it is always good to try to get a little historical perspective on Gold Fundamentals.

For some that means looking at a weekly or monthly chart (see the posts below.) However, that gives technical perspective. Technicals only help traders. Fundamental perspective is why you invest. Fundamentally, I could go on about the debt problems, the unfettered issuance of paper money, the impending end to QE2, the depression that will follow, and then the ramping up of QE 3,4,5 etc. But everyone should know all about that by now.

Instead let me offer some true fundamental historical perspective.

Above we see pictured a Distater (double stater) issued by Alexander the Great in about 334 BCE which would have been used to pay the monthly salary of a military captain. I've chosen this coin because it is in what is called GOOD VF Condition - a decent collectible grade with little of the premium associated with a top grade coin. This coin sold for about US$20,000 a few months ago in New York. Top mint state versions now sell for around US$100,000. But for our purposes this well preserved - but unexceptional specimen - serves a better purpose.

What does this coin tell us about gold?

First, a military captain would have been paid a half ounce of gold a month.

This is a reminder that in 334 BCE gold was money, and a half ounce served as ample payment for the most prestigious job of the era. Second it's a reminder that this payment was only double that of the average soldier.

In other words, gold fulfilled its function not only as a medium of exchange, but also as a guarantee of a store of value. Since it could not be printed at will, those at the top of the governmental/banking structure could not simply print unlimited quantities to award to themselves, thus destroying the value for everybody else.

In the US the average CEO pay last year was NINE MILLION DOLLARS (excluding bonuses and options). This is more than 350 times the pay of the average US worker. There are more than a 1000 billionaires now worldwide.

Whatever reason you might use to justify this, the salient fact is that as paper money becomes amassed in increasingly greater amounts in increasingly fewer hands the value of paper money is destroyed for everybody else.

This very simple historical lesson shows why gold is now assuming its historical function as real money.

Finally, as an interesting note, I would simply point out that as gold assumes its role as real money there is an increasing fascination with real historical gold money. The coin above would have sold for about 5000 dollars back when bullion was at 400 dollars. This coin and bullion have increased at roughly the same rate.

Yet in mint state back then this coin was only worth about 7500. Now in top condition this coin has outpaced bullion by about 3:1.

This again shows the power of the concentration of paper money, as those with the greatest access to it are now those most aggressively seeking to diversify out of it. And as they do, the prices of all valuable commodities will get bid up to fantastic levels in paper money terms - thus accelerating the destruction of the value of paper money for everybody else.

And thus hastening the return of gold as real money.