On September 3 MetalMeister posted some interesting thoughts over on the Buy High Sell Higher Forum.
The gist of his post is that we will never see a true international gold standard, because it can’t be controlled. He also comments that the price of gold (and silver) is related to the cost of labor and oil, since those items are required to mine gold. If labor costs drop, the price of gold could also drop.
I have no idea if we will ever have an international gold standard, and while costs of production impact the price of commodities I suspect that actual annual gold production has a minimal impact on the daily price of gold, since all of the gold mined in history continues to exist, in some form, as part of the global supply.
It does however raise an interesting question, which is “why is gold worth anything at all?”
The obvious answer is that something has value because it can be used for something. Gold is a great electrical conductor and thus has value to anyone building electrical circuits. It is highly malleable; you can pound it wafer thin. It doesn’t corrode, unlike most metals.
But of course those physical properties only account for a small percentage of the price of gold, because most gold is not used in electrical circuits, or any other industrial application.
Gold is, primarily, a “store of value”.
Let’s ponder that concept, shall we?
Let’s assume that you have worked very hard and have managed to save some money. You have created wealth. How do you preserve your wealth?
If you really like peaches you could buy a lot of peaches, but after a week or two they will spoil, and your wealth is gone. Not a great long term idea.
You could take the conventional route and put your money in a bank, but there are numerous examples in history where banks have failed. We all remember the recent stories of the banks in Cyprus that failed, leaving their depositors with greatly diminished wealth.
You could invest in a business, but it needs to be managed, and no business lasts forever.
You could invest in real estate, which over the long term tends to increase in nominal dollars, but not always, and not always in the short term. Again, real estate requires management, and generally there are other operating costs, like property taxes, to be paid.
And that’s where gold comes in to the picture. Gold doesn’t corrode, requires no management (other than looking the door to your vault), and while it’s price in nominal dollars will fluctuate, over the long term it is an excellent store of value. Best of all, unlike a paper asset like a bond, gold is no-one else’s liability. With gold, you have no worries that the counter party won’t pay, because there is no counter party.
That lack of a counter-party demonstrates MetalMeister’s point: gold can’t be controlled. It can’t be printed, or created out of thin air. So, if I was the “Powers That Be” and I wanted to control the economy, I would require all transactions to be in easily printed and controlled paper money, and not hard to create gold. So I agree, it is possible, even likely, that we will never have a true gold standard, unless the economy becomes so crushed that we have no alternative.
However, I still view gold as an excellent long-term investment, because it is a store of wealth.
If you are a rich (Asian, Indian, American) business person, where do you put your wealth? You put it in physical gold. Provided you spread your vast horde amongst secure storage facilities in various places around the world, your wealth is protected, and there is virtually no other store of wealth as secure.
That’s why, this week, I have placed stink bids, and below market bids on the stocks I want to own, and I will use the traditionally strong month of September to add to my holdings. Yes, I realize that stocks are paper and are therefore not physical metal, but if the metal increases in value so will a basket of high quality stocks. The trick, of course, is to pick your spots. I rarely place market orders. I pick my spots so that my orders are filled on days of market weakness, and I place my sell orders to sell on days of strength.
Make volatility your friend, and buy when the prices are down, and sell as they grow. If you want protection, take your profits and invest in physical metal, so you get the best of both worlds.
That’s my theory. We shall see how it goes this month.
Thanks for reading. See you next week.
Tagged as:
Gold
Gold: The Big Picture
by JDH on September 7, 2013
On September 3 MetalMeister posted some interesting thoughts over on the Buy High Sell Higher Forum.
The gist of his post is that we will never see a true international gold standard, because it can’t be controlled. He also comments that the price of gold (and silver) is related to the cost of labor and oil, since those items are required to mine gold. If labor costs drop, the price of gold could also drop.
I have no idea if we will ever have an international gold standard, and while costs of production impact the price of commodities I suspect that actual annual gold production has a minimal impact on the daily price of gold, since all of the gold mined in history continues to exist, in some form, as part of the global supply.
It does however raise an interesting question, which is “why is gold worth anything at all?”
The obvious answer is that something has value because it can be used for something. Gold is a great electrical conductor and thus has value to anyone building electrical circuits. It is highly malleable; you can pound it wafer thin. It doesn’t corrode, unlike most metals.
But of course those physical properties only account for a small percentage of the price of gold, because most gold is not used in electrical circuits, or any other industrial application.
Gold is, primarily, a “store of value”.
Let’s ponder that concept, shall we?
Let’s assume that you have worked very hard and have managed to save some money. You have created wealth. How do you preserve your wealth?
If you really like peaches you could buy a lot of peaches, but after a week or two they will spoil, and your wealth is gone. Not a great long term idea.
You could take the conventional route and put your money in a bank, but there are numerous examples in history where banks have failed. We all remember the recent stories of the banks in Cyprus that failed, leaving their depositors with greatly diminished wealth.
You could invest in a business, but it needs to be managed, and no business lasts forever.
You could invest in real estate, which over the long term tends to increase in nominal dollars, but not always, and not always in the short term. Again, real estate requires management, and generally there are other operating costs, like property taxes, to be paid.
And that’s where gold comes in to the picture. Gold doesn’t corrode, requires no management (other than looking the door to your vault), and while it’s price in nominal dollars will fluctuate, over the long term it is an excellent store of value. Best of all, unlike a paper asset like a bond, gold is no-one else’s liability. With gold, you have no worries that the counter party won’t pay, because there is no counter party.
That lack of a counter-party demonstrates MetalMeister’s point: gold can’t be controlled. It can’t be printed, or created out of thin air. So, if I was the “Powers That Be” and I wanted to control the economy, I would require all transactions to be in easily printed and controlled paper money, and not hard to create gold. So I agree, it is possible, even likely, that we will never have a true gold standard, unless the economy becomes so crushed that we have no alternative.
However, I still view gold as an excellent long-term investment, because it is a store of wealth.
If you are a rich (Asian, Indian, American) business person, where do you put your wealth? You put it in physical gold. Provided you spread your vast horde amongst secure storage facilities in various places around the world, your wealth is protected, and there is virtually no other store of wealth as secure.
That’s why, this week, I have placed stink bids, and below market bids on the stocks I want to own, and I will use the traditionally strong month of September to add to my holdings. Yes, I realize that stocks are paper and are therefore not physical metal, but if the metal increases in value so will a basket of high quality stocks. The trick, of course, is to pick your spots. I rarely place market orders. I pick my spots so that my orders are filled on days of market weakness, and I place my sell orders to sell on days of strength.
Make volatility your friend, and buy when the prices are down, and sell as they grow. If you want protection, take your profits and invest in physical metal, so you get the best of both worlds.
That’s my theory. We shall see how it goes this month.
Thanks for reading. See you next week.
Tagged as: Gold