Monday, September 7, 2009

If gold is money, why quote it in dollars?

Commodities are quoted in dollars out of habit and because New York and Washington command so much economic and military power. The dollar was the most stable currency for almost 200 years. For more than 100 years, the value hardly moved at all. It has only been in the past 40 years that the value of the dollar has dropped significantly. Gold is quoted in dollars because that is still the milieu de jour. Dollars have been the numeraire of world commerce for the past 70 years and so they are the de facto quote. If the dollar loses its numeraire status than people will quote the price of goods in terms of the numeraire, and the dollar will have lost its worth, unless it is somehow convincingly tied to the new numeraire. But in the meantime gold theorists would appear out of touch if they did not quote gold in terms of dollars but chose instead barrels of oil of BTUs of natural gas or some other metric. The dollar is still the most commonly used monetary metric in the world, but that does NOT ensure it has any intrinsic value. In that sense a dollar is kind of like an out of the money option. It has time value, and the possibility of intrinsic value so long as the US financial ship remains in decent condition. But if and when enough holes are poked in the financial ship of the US then the dollar will expire worthless at some unmarked point in the future.
I recently listened to a podcast from a website called Financial Sense Newshour.
http://www.financialsense.com/fsn/main.html On this podcast, the host Jim Puplava indicated one possibility for the future was a dollar devaluation. A number of his listeners called in to ask him what a dollar devaluation would look like. I have started to think about this question and will post on this tomorrow. Come back and read the post if you'd like!

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