WatchI'm sure this has been discussed here before, but I haven't found a good explanation. Anyone care to explain why gold is considered to be some universal store of wealth?
The best I have dug up is the "durable, limited quantity, limited production" argument. OK, so why not tellurium? It's as rare as platinum, relatively durable, and also has limited production.
We could play the "why not x" game for a while, but maybe more to the point is that gold doesn't seem to have much intrinsic value. Aside from being shiny (jewelry) and having some limited industrial uses, it doesn't seem all that useful. Why is it so valued?
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Bellingham, WA
gold has a very wide range of uses.
it's a great industrial metal and it's also a great decorative metal.
it's got the historical tradition of being money-good, too, and good density for value (unlike silver) for portability.
it's probably easier to assay gold than other metals, too.
what's the floor on the price of gold? $500 an oz? $900?
when other asset classes were hot in the last decade gold may have been $300-400/oz, but there's a lot more people in the market for it now, and there's not much other inflation hedge that's available to the masses.
Poor platinum, it used to trade at a premium over gold, but not any more.
There's an immense stockpile of the stuff, but everybody who buys it likes the shiny and wants to swim in it like
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Santa Cruz, CA
The only true argument for gold is as currency. The first clue you see is how the value of the dollar is going down because of so much liquidity was added to our financial system. QE, QE2. The effect on the dollar is exacerbated by trade deficits and debt spending and total debt of $15 trillion.
ALL of these contribute to a falling dollar value.
The answer to having something else could be just another currency instead of gold.
The huge difference between gold and dollars or other money is that the supply of gold cannot be quickly increased. They get gold out of the ground not nearly as fast as Bernake can "print money", or increase the supply of dollars.
Likewise, the supply of gold is not determined by the whims of some guys in Eurozone who may also do things that can affect the value of their currency.
I like to think of gold not as an investment, but rather a new default international currency that cannot be fucked up by Bernake or politicians.
As a default currency, gold seems to be doing fine. They appear to be increasing our debt spending, and Bernake said he will not raise interest rates for the time being.
Previously you could have accomplished the same thing as owning gold by opening an account in Swiss Francs, since they had such a stable currency. But, lately the Swiss became alarmed how valuable their currency became and this frightened them since too valuable means harder to export products that losers like us or Greeks, Italians, Spanish could even afford to buy.
I don't believe that gold is a bubble, and I would consider gold as the equivalent of cash that I would like to preserve.
For investment purposes, I use stock funds. To balance my own portfolio, I also own bond funds but they're not going to appreciate capital, nor should they normally.
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After the feces hits the fan. (March 22) and global currencies are unrecognized by any vendor. They might trade you a taco for a gold bracelet. Maybe a bushel of corn for some gold coins.
I like Titanium ? But ya Can't hang it on a women and get the same glimmer.
Besides, The Titanium Teeth craze was short lived !
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swebb says
Most especially because they are shiny, Gold and Silver were both valued in the old days. Gold doesn't rust. Then we found out how Silver out-supplies gold. And silver got swept to the sidelines. Some people still buy silver.
Even now, the British Pound is still officially named Pound Sterling. Imagine if our currency was named The Dollar Copper, and the name stuck.
In ancient times, Gold and Silver became the currencies. Then, paper money became the norm after the mint's ability to print paper money became fairly hard to duplicate. Also, we got better at finding and prosecuting counterfeiters.
People who grew up in cultures that appreciate Gold will always appreciate gold. They are inclined to find any and all reasons why they like Gold. Of course they are biased, and will convince themselves, consciously or subconsciously, that Gold is somehow worth the price. It would hardly matter if it were $50/oz or $5000/oz. Some people have inherent cultural affinity to Gold.
And, of course, the supply. We have never extracted more than 2.1% of pre-existing Gold in one year. Therefore, it won't be able to match our population increase. The more people there are, the less Gold there is on a per-person basis. This is largely why it keeps its value.
Personally, I think Gold as jewelry is barbaric and tacky. However, so long as other people believe in Gold, then other people like me are also willing to hold Gold. Like an economy, it's all a matter of faith. Faith that there is a greater fool willing to pay a higher price.
If people have no faith in your country, then they are unwilling to hold your currency. In the end, gold is currency so long as people continue to believe it is currency.
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Ludwik Kowalski's website
Swebb wrote: "... However, so long as other people believe in Gold, then other people like me are also willing to hold Gold. Like an economy, it's all a matter of faith."
How can one disagree with this?
Ludwik Kowalski (see Wikipedia) is also the author of a FREE ON-LINE autobiography, entitled “Diary of a Former Communist: Thoughts, Feelings, Reality.”
http://csam.montclair.edu/~kowalski/life/intro.html
It is a testimony based on a diary kept between 1946 and 2004 (in the USSR, Poland, France and the USA).
The more people know about proletarian dictatorship the less likely will we experience it. Please share the link with those who might be interested, especially with young people, and with potential reviewers.
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swebb says
"Value does not exist outside the consciousness of mankind" - Carl Menger, founder of Austrian school.
No better explanation than people consider it to be the universal store of wealth, therefore gold is universal store of wealth.
If you doubt the above explanation or find it unsatisfactory, answer a simple question: why do central banks hold gold?
swebb says
OK, the below video may seem like propaganda :-) but I don't think anybody can find any factually wrong positions in it.
clambo says
Clambo is spot-on here. Gold is a form of savings protected from currency debasement.
When a single medium is used as both store of value and medium of exchange it leads to a conflict between debtors and savers.
The real conflict today is between debtors and savers.
http://fofoa.blogspot.com/2010/07/debtors-and-savers.html
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Bellingham, WA
2:30 (GLOBAL GOLD PRODUCTION IS FALLING) is wrong in that video
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swebb says
It's toxic in minute quantities and puts off a terrible "Garlic Breath" smell and causes digestive problems.
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Swebb,
To me, gold is a hedge against high to hyper-inflation and is part of your asset protection.
Example: 1/2 of your asset is in USD, 1/2 is in gold.
In a hyper-inflation scenario, USD is losing value due to hyper-inflation, which means gold technically should go up in value.
If we're having deflation, USD should technically goes up in value, therefore gold should go down in value.
I believe real estate is a much better hedge compared to gold, and it pays dividend too (monthly positive cashflow from your tenants).
In a hyper-inflation scenario, your rent technically should go up a lot while your monthly payment stays to same. In a deflation environment, rent should go down, which means your profit margin gets compressed; however, interest rate should also go down during deflation period. By refinancing, you should be able to lower your monthly payment. If your property goes down in value, your property tax is reassessed lower too. Therefore, it expands you margin and puts you in a decent position too.
When it comes to real estate, remember this quote and you will be ok. "Make money when you buy, not when you sell." Let the numbers be your guidance, and you will not make stupid RE purchases. Don't try to ignore or fudge the numbers to convince yourself to make purchases that are marginal or doesn't make sense.
Because of the above reasons I don't own any gold. It's either real estate or USD.
Cheers. :)
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Bellingham Bill says
Over long term, if you look at the past decade.. it's been falling.
http://gregor.us/economics/global-gold-production-how-sustainable-a-rebound/
And guess what will happen when oil shoots to $150 a barrel?
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Why PHYSICAL gold? Because you have no way of knowing you should own it or not, as an investment class. Hedge your bets and cover your bases -- get some.
Same goes for PHYSICAL silver.
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uomo_senza_nome says
"The other side of the coin is that rising costs have not prevented producers from posting record margins. In the first quarter, margins rose from $758/ounce to $767/ounce."
http://247wallst.com/2011/06/22/rising-gold-production-cost-very-uneven-from-miner-to-miner-abx-nem-au-gfi-hmy-gdx-gdxj-gld
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E-man says
In the US rentals are a highly regulated industry. We have leases and real estate law for a reason, and the social benefits of these, particularly in protecting the poor from price gouging, are enourmous. However, these laws make it harder to adjust rents in response to inflation or deflation. A lease prevents such increases or decreases during its term and some states and munipalities have rent stabilization and rent control laws which further limit the price control power of the landlord.
While I still think rentals are a great investment, they don't have the immediacy against inflation or deflation that gold does as hyper inflation tends to be a short term deal. To prevent anarchy, governments comes in, replace the currency, and within a few weeks the crisis, where deals of a lifetime are to be found, is over. Savings have been lost but nobody is trading real estate for medicine or cars anymore. Gold, silver, and tangible goods are better for this purpose.
If however you want a reliable revenue stream, rentals are generally a good bet.
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Gold is Money. Period.
An item must have six characteristics to be considered as money:
Durability
Portability
Divisibility
Uniformity
Limited Supply
Acceptability
Of all the other currencies known to man, no other currency fits the bill (pun intended) as well as gold does.
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swebb says
The real questions are... Should gold be used as the official currency? What is the criteria for deciding what to use as currency?
There are four important properties for a good, reliable, efficient, and social just currency -- what Ben Franklin called "honest money".
1. It's a medium of exchange.
2. It's a store of constant value.
3. It's a unit of measurement for evaluating worth over short and long periods.
4. It's a unit of accounting for short and long periods.
How do various strategies fulfill the above properties?
Gold - Gold backed currency. Paper or electronic.
Silver - Gold backed currency. Paper or electronic.
Metal/Stone - Use a conglomeration of precious and semi-precious metals and stones.
Commodities - Use a large range of commodities including metal/stone and non-durable goods that generally don't fluctuate over long periods of time like wheat and sugar.
SQ Fiat - The currency system we use right now. (Status Quo)
Colonial Scrip - A fiat currency like Colonial Scrip. Ben Franklin's honest money. The Money Masters from 00:34:14 to 00:40:00.
Single Dollar - The solution I've proposed here.
Gold fails to maintain value of short periods and Status Quo Fiat fails to maintain value of long periods. Other commodity-based currencies do better, ones that are harder to manipulate because the market is too large.
However, the Single Dollar solution works best. It's value as a fraction of all wealth is mathematically held at a constant. And the number of monetary units can be expanded arbitrarily, but no expansion would result in a transfer of wealth. The Single Dollar solution requires no trust in monetary policies or central banks.
Furthermore, long-range economic comparisons even spanning millennia would be meaningful and easy. Accounting units would be consistent. The only other currency system that comes close is Colonial Scrip and even that isn't as good.
The ultimate problem with gold is that anything that is a good investment cannot be a good currency. A currency should not fluctuate in value. It should not rise or fall. The fact that gold has been becoming more valuable than other goods is why it isn't currency material. Similarly, Federal Reserve notes fail for the exact opposite, but equally bad, reason. Contrary to some opinions, inflation is theft from savers and it harms the economy.
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the melt value of the silver coinage of 1964 is 24X of face value today.
But if you had taken those coins and bought an index fund you'd be up 64X today.
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E-man says
Yep. That is the difference. You can trade your cash flow for food and you still have your property. dunross cannot do something like that with his gold.
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My investing gains 85% in the last 2 years:
January 2010: 1.0
January 2012: 1.85
Gold for comparison 42%
January 2010: ~$1,120
January 2012: ~$1,600
Plenty of sharpies & connected players that did WAY better. And I'm sure there's PM futures & options players that did better than that. However I'm still not seeing "magic" here if you are just some person buying a few bars and stashing them in a safe.