Gold as a Medium Of Exchange (MOE) has been used for centuries alongside other metals i.e. silver & copper. In today’s world, gold is considered an investment. So, does it also mean that silver, copper or fiat money; the currencies that we use today, can constitute as a form of investment?
Essays in Persuasion by John Maynard Keynes, the famous economist provides wonderful details on gold and the gold standard from which most countries have given up, amongst others; why was that an important decision, how gold was previously transferred between countries physically but now typically sits in certain locations only (central banks) and basically why is gold a fundamental part of the global economy. (There are also key mentions of how inflation plays an important role for businesses and governments)
[ Essays in Persuasion by John Maynard Keynes (full);
http://www.gutenberg.ca/ebooks/keynes-essaysinpersuasion/keynes-essaysinpersuasion-00-h.html#Economy
Please self check for any breach of copyright laws in relation to this link to which was sourced via internet ]
In brief, post world war 1, the world fell into economic disarray and numerous countries had opined to revert back to their previous gold standard, Britain being one of them but this proved to be a bad move as the currency exchanges had varied by a great degree. Export, Import, Inflation, Deflation, Budget deficits/surpluses, all showed that a free exchange rate without reverting to the gold standard was the way forward towards economic prosperity. In short in today’s era, USD to MYR 4.07 as of 31/08/2016 provides much benefits to domestic parties of both countries benefitting both economies while being able to adjust conditions via government policies (monetary/fiscal) without resorting to the gold standard system.
[The Gold Standard ran on a basis that the world was a stable playground, which it relatively was 100 years prior 1930 in reference to global pricing and inflation among others. Upon divergence in domestic and foreign prices of goods and capital post WW1, it was more conducive for governments to help stabilise their economies with monetary policies in example rather than try stabilise the world wholesomely via a global gold standard)
This might seem gold is of lesser importance today as central banks are able to manipulate the value of gold through various means besides the relatively stable mining supply output of gold and demand from technological & retail sectors among others.
In essence, gold can be said to be an oldest and time tested MOE that mankind will probably continue to use for a long time to come. Money that we use today is after all a lesser durable piece of paper guaranteed by central banks to be a form of a MOE looking at their physical durability.
However, one would opine gold is to be viewed as a MOE and not a form of investment the same way one would feel the urge to store Foreign Currencies.
The best way to view an investment with regards to MOEs is to figure out what unit/item will probably be used for a long time to come as an exchange medium. Besides gold, it is highly probable well established branded products, superior quality goods as a result of patented R&D or even unique primary goods i.e. agriculture produce will be a highly in demand items that can be exchanged anytime with the MOE of the day for hundreds of years to come. In short, a good business producing something essential in fulfilling the pursuit of happiness of mankind is in itself a MOE, a bet to garner sufficient returns regardless of future currency fluctuations or MOE woes.
Despite these arguments, one would opine that due to the constant increase in the supply of capital globally now in trillions of dollars, gold price may increase in tandem due to numerous market forces tying up the value of these capital supply to the metal despite our straying from the gold standard. One may also argue, should there be a global currency disaster, gold may take the pedestal and rise as the ultimate MOE and appreciate drastically in price.
In conclusion, considering businesses are constantly keeping in tandem with economic reality, investment in business is still promoted as the wisest decision.
[ Note: Self Sustainability can be considered the most essential personal investment in regards to future disasters ]
Malaysian SME
Numerous articles have been published in YR2016 explaining the readiness of local banks to continue providing funding for local Small and Medium enterprises which is on a positive note, as long as these businesses have strong interest coverages. Agriculture Bank of Malaysia (Agro Bank) continues to present support for credit towards local businesses. Agribusiness is viewed to have a relatively conducive and improving domestic environment with support from domestic government and SMEs.
Brief Global Outlook
General business sentiment globally seems to be negative and in line with previous posts, with regards to possible effects from the maturing of the long term debt cycle in many countries. In an interesting twist, if we were to apply an analogical story from Sylvie and Bruno mentioned by Mr Keynes in his book Essays in Persuasion, between a Professor who ordered a suit and the suit maker. The suit maker comes to collect his tailor costs of 2000 pounds for the past many years from the Professor. The Professor cleverly proceeds to encourage the tailor to hold off the debt and only to be paid next year, double the amount. The dialogues ends as such:
"Will you ever have to pay him that four thousand pounds?" Sylvie asked as the door closed on the departing creditor.
"Never, my child!" the Professor replied emphatically. "He'll go on doubling it till he dies. You see, it's always worth while waiting another year to get twice as much money!"
The world may go on in this fashion, debt piling to infinity until and unless more rational methods are taken up concerning debt cycles for examples those mentioned in Economic Principles by Mr Ray Dalio of Bridgewater Associates or by many other intelligent people in the financial, educational and governmental organisations.
[ Economic Principles by Mr Dalio; http://www.economicprinciples.org ]
Until next time, happy value investing.
[DISCLOSURE: The writer has no investment or purchases of gold and has no credit relationship/affiliation from/to any SME banks or Agrobank.]
[DISCLAIMER: Everything stated in this blog is purely the opinion of the writer and any decision taken should be based on sound judgement with risks fully born by the decision maker. The writer shall bear no responsibility for any losses due to adherence of advices blogged by the writer or any commenters. Informational discrepancies are possible and will be corrected if any.]
