One of the topics I really hate talking about is gold, but I can’t ignore it anymore since the metal is now trading around $1,800. This is becoming insane. Investors are saying that gold is the only real “money” right now with a real intrinsic value, and all the other money in the world is now heading into oblivion.

But the question is, who determines that gold is worth something or not? Who determines that gold has an intrinsic value? Isn’t us, the humans, who, coincidentally are the same humans who think that the US Dollar has an intrinsic value? What is the use of gold, other than buying jewelry for a girl who may or may not like what you will get her, and who will certainly prefer anything diamond instead of gold. Can we use gold as a currency like the “good (very) old times”, when people used to use gold coins to do trades and buy real estate? Of course we can, but do we have to? People in ancient history used to use gold as a currency as it was impossible to counterfeit, but now times have changed, governments are able to print money that is nearly impossible to counterfeit, so what’s the point?

I think I will now end my rant about gold and move to the subject of this post, “how can the dollar survive?” This question, that is asked by many investors out there, imply that the dollar is struggling. Let me state some facts that will counter this argument:

• The Euro, which is the second most important currency in the world and the main competitor to the USD, is really struggling, casting some doubts on whether the Euro will still exist in a few years from now (I think that by 2013 the Euro will vanish, or at least will not be as strong as today).

• The USD is the still by far the most important currency in the world. All major trades (such as those related to oil) are done in the USD. I think the most ironic thing is that gold is priced in USD, and not the other way around (You know what an ounce of gold is worth in USD, but when was the last time you wanted to know how much is $1 worth in gold).

• Gold is not enough to be used as an international currency. Every day, there are trillions of dollars in transactions (from a guy buying a small apple in a store to another one buying a mansion in Hollywood). There is just not enough gold to cover these transactions.

• The Swiss Franc and the Japanese Yen are not as immune and as strong as everyone seems to think. Investors are running to these 2 currencies en mass today, which is pointless, because whether you like it or not, these currencies are strongly tied to the USD and the US economy. Imagine the Japanese economy without American customers buying their products. Imagine the Swiss economy without American clients depositing money in its banks.

• China is not ready, nor it is willing to, to take America’s role leading the world’s economy. Some investors who think long term believe that the Chinese Yuan will replace the USD as an international currency. I think this will never happen, not in 10 years, not in 20 years, and not in 50 years. Here’s why:

  • Investors need transparency. China has no transparency whatsoever.
  • Investors need a government that respects the rights of companies (think copyright laws in China versus those in the US).
  • China has a lot of problems that are very rarely exposed to the public.

Gold is a major bubble, and a very dangerous game. Gold has no value expect what we investors think it is worth. The USD is here to stay, and does not need to survive. I’m not sure though if gold will survive as a long term hedge for nervous investors.