Gold Rises as Stocks Tumble
By - October 07, 2008

Gold gained as investors sought a safe haven after stock markets dropped on growing fears for the global economy. Gold was trading at $862.25 an ounce, up $4.80 an ounce New York's notional close on Monday, when it gained almost 4 percent on losses in equities markets — defying a rallying dollar and weaker oil prices. Japan's Nikkei stock average fell 1.38 percent on Tuesday after the Dow tumbled below 10,000 for the first time in four years on growing fears for the global economy. – Reuters

Dominant Social Theme: Gold, a safe haven! For now, anyway.

Free-Market Analysis: A funny thing happened on the way to a commodity collapse. Gold went up. As part of the endless attack on money metals by the monetary elite, the idea that gold and silver are "commodities" has been another arrow in the quiver of honest-money negativity.

But gold and silver are not commodities, and now is as good a time as any to point that out. Why? Because commodity prices are collapsing while gold and silver prices are moving up. Yes, this can change overnight. But the divergence illustrates the point. Here's an excerpt from the Business Standard, dealing with the commodities end of things:

Last week, global commodity prices recorded their biggest weekly fall in over 50 years. This is not a flash in the pan, as the decline has been accelerating since prices peaked in July; values are down by a third since then, and still falling. This mirrors the behavior of international crude oil prices, which are also similarly down from their July peaks. The dramatic drop in the Baltic freight index for shipping rates, to about a third of what it used to be, tells the story very succinctly of the sudden shift in outlook. Indian commodity prices too have been falling, but rupee prices have been cushioned to some extent by the fall of the rupee against the US dollar, by 3 per cent in as many weeks and 16 per cent fall in the last six months.

For a while, in the recent past there were timid suggestions that oil was a "safe haven" – though how this would make sense defies logic. But gold and silver really are "safe havens" because they are MONEY METALS and thus more or less always in demand.

Let's examine why in more detail. Start with oil, since oil has been so "hot" in the past year. It takes a good deal of effort to get oil out of the earth. But if the economy is weak, then the oil that has been extracted has fewer destinations. Likewise, it takes a good deal of effort to mine gold and silver, but the demand for gold and silver is not necessarily dependent on the performance of the economy. In good times, people tend to buy jewelry and gold and silver coins. In bad times, there are always buyers for gold and silver as well. It's just in bad times that people recognize the intrinsic value of money metals more clearly. Panic sharpens appreciation.

After Thoughts

Gold and silver prices move up and down, and there is no gainsaying that their valuations are manipulated by those who do not wish money metals to become too evidently valued lest they reflect badly on the current fiat money system. However, when fiat money goes through one of its periodic stagflations the value of gold and silver becomes more evident. It is not very hard work to push a button in a fiat money system to offer banks more credit. Likewise, the act of printing physical fiat money is not arduous. And since the laws of nature apply to money as well as anything else, the value of fiat money eventually depreciates until it recognizes at least to some degree the effort that is made to generate it. And that's not very much!

Gold and silver retain value because it takes a lot of effort to dig them out of the ground and because, once they are out of the ground, they are a convenient store of value and useful to boot, especially silver. But to label them commodities is to miss the point. At times like these, when the price of gold and silver depart from wheat, corn and even copper, the difference is starkly clear.

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