A recent blog post by Davies is also very thought provoking – here is a snippet:

In a paper money world the existence of money rests on a single convention – faith. This faith is no fragile concept. Even under the greatest provocation of the medium’s validity, the value of having a common money is so great that individuals will stick to that faith.

But now people are beginning to lose faith in our watered-down money and have turned to real geld – as the Germans would say – real money: gold.

What should you make of the recent stampede to own gold? A detached observer might be puzzled by the obsession to own the yellow, shiny stuff. Warren Buffett once wryly observed, “It gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head”.

Buffett’s response is too smart by half. A Martian would be equally puzzled to see humans cut down a $100 tree in order to pulp it, turn it into paper, print numbers on the paper, and pass it off as dollar bills worth $1 billion.

Gold antagonists claim that gold is a Ponzi scheme. Its value continuing to rise, they say, depends on people willing to buy it at higher prices from previous buyers. This is to misunderstand the nature of gold. It is not just another commodity. Gold was once money, and no doubt will be again. The last four decades are the blip in time when money has not been backed by gold.