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An Open Letter to Hugo Salinas Price

November 14, 2012 in Gold, Investing, Money, Precious Metals, Silver

BY KEITH WEINER, 11-14-2012 (http://www.financialsense.com)

Dear Mr. Price:

I read your piece: “On the Use of Gold Coins as Money”. I think you ask the right question. This is the elephant in the room. Why do gold and silver not circulate?

I love your analogy of the Swiss asserting that they will “allow” gold to have a monetary role, this being like “re-hydrating water.” It is not within the power of foolish governments either to imbue water with wetness, or gold with moneyness.

Gold is already money. It is the commodity with the tightest bid-ask spread. It is the commodity with the highest ratio of inventories divided by annual mine production (stocks to flows). And it is the commodity whose marginal utility does not decline. These statements are as true for gold today as they were under the gold standard 100 years ago.

Let’s look at marginal utility. I think you hit the nail on the head: people will pay in anything but gold, if it is possible to do so. People prefer to keep gold, and this preference has nothing to do with the amount of gold they or anyone has.

What is the practical effect of this? There are two things that individuals could theoretically do with their gold. The first is that they could hoard it. It does not produce a yield, and it does not finance production. But if there is no other option available this is what people must do.

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