“To me the gold price takes the form of a very uncomplicated formula, and all you have to do is divide one by ‘n.’ And ‘n’, I’m glad you ask, ‘n’ is the world’s trust in the institution of paper money and in the capacity of people like Ben Bernanke to manage it. So the smaller ‘n’, the bigger the price. One divided by a receding number is the definition of a bull market.” - Jim Grant, Grant's Interest Rate Observer
For centuries gold has been considered a store of value. It was treasured by humans long before it ever became money in the form of gold coins around 700 B.C. Gold’s malleability, scarcity and luster made it a natural trading medium. Its portability and permanency gave rise to our modern day understanding of using currency in exchange for goods and services. When banknotes or paper currency were first introduced, they were seen as a promissory note to pay a debt in precious metals.
Recently, gold has been under attack by some very smart and well respected individuals. Ben Bernanke refused to acknowledge that gold was money when questioned by Senator Ron Paul last year. Warren Buffett stated that gold has no utility and equated its value to the “greater fool” theory (our words, not his) in his most recent annual report. Lastly, Buffett’s long-time business partner Charlie Munger was quoted saying, "Gold is a great thing to sew into your garments if you’re a Jewish family in Vienna in 1939, but I think civilized people don’t buy gold, they invest in productive businesses."
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