OPINION — The value of gold

Although central banks, hedge funds and others involved in finance insist that inflation is low, this is not the case. Gold companies that recognize the difference between gold and paper money, however, may be able to guard against its effects.

The data released by governments concerning inflation are a fantasy. For example, governments may remark that, at 3%, inflation is under control. At such an annual rate, consumers would lose half of their buying power in 23 years. At an annual inflation rate of 5%, buying power is halved in 13 years.

Throughout civilized history, all paper money has been devalued to nothing at one point or another. The value of gold, on the other hand, has never dropped to zero. That’s the reason people buy gold or gold stocks. The difference between them is that the metal has inherent value, whereas stock value depends on a company’s management, which is transient. Similarly, the gold mines owned by those companies will not last forever.

A gold mine should be run according to a mandate that recognizes the difference between gold and paper money, and should include the following provisions:

* Gold should be sold only as needed, to pay expenses. The sale of surplus gold requires the payment of taxes, which, in turn, depletes shareholder value.

* The excess gold that does not sell should be transferred, quarterly or monthly, to a shareholder account. That gold then becomes a shareholder asset. Each month or quarter, the company could publish how much gold each share is worth. Stock can then be sold or exchanged for the metal at a depository, thereby creating warehouse receipts or an annuity.

There are several advantages to this

system:

* Less gold on the market means little need to hedge. If central banks wish to sell gold, let them supply the market.

* The share value of a normal gold mining company depreciates as gold is extracted and sold. That is inherently unstable. If the gold is not sold, the value per share increases as the mine’s life draws to an end.

* If the market knows that this is the way a particular company operates, fewer “24-hour investors” will play with the stock. Shareholders will remain loyal for years.

On the downside, governments would likely be upset that the private sector has left them to supply and manipulate the market. In addition, under such a system, the management of companies would be forced to operate in a truly shareholder-friendly way.

— The author, who has served as a visiting consultant to the Harvard Graduate Business School, is the author of three books and more than 200 articles on business and finance.