using gold to buy gold

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jimmy replied on Tue, Mar 31 2009 2:30 AM

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sthomper:

i assume, correct me if i am wrong here, that the gold is paid for with fiat currencies.

 Kind of... it is in the same way that US dollars are paid for with Euros. Both are just convertible currencies. Gold, with very little use as an industrial good or a commodity, serves primarily as an inflation hedge and a reserve currency (for central banks). It is traded in the markets as a currency. It's not quite like the fiat currencies, since it doesn't pay interest and it does actually have some use value (in addition to it's exchange value) but most people treat it like another currency.

sthomper:

would the inflationary characteristics of fiat currenices, within a fractional reserve system create conditions that would accelerate gold production (money included) above what a 100 percent reserve gold money system would do?

Only if the new money created via inflation were used to bid up the price of gold beyond the extent to which it were used to bid up the prices of other goods... so basically, if those doing the inflating had a pension for gold then yes, you would probably see increased investment in gold mining (this would essentially be an unsustainable distortion).