Written in the history books of mankind in the past and present, rarely do we go about mentioning wealth without the inclusion of the precious metal gold.
We have come a long way in the measurement of yardsticks in regards to predicting gold price movements, the measurements of supply and demand and its influences of stock prices.
The basis of this articles aims to uncover the few but extremely certain and practical views in which Gold does play a part in this lifetime and many years to come.
The Flaws in Today's Measurement Systems
You have to give credit to Wall Street, the notion of holding assets and turning them over quickly in search for quick profits have been very much inflated over the past years. Very rarely do analysts or funds for that matter, have the luxury of giving market forecasts which stretch over a 5 year period. Majority of articles, news columnists, news channels and analysts are credited to focus on the short term outlook, typically quarterly, monthly to split-second basis.
The information flow as we know of today brings three fatal flaws for investors;
1. Trust in paper-gold
2. Old notion belief that gold is currency
We address "trust" with regards to several investments in funds which represent the going market pricing for gold. There is a simple test to which an investor can attest to the certainty of buying paper gold is akin to buying physical gold. Take whatever stock holding in a ticker symbol you have, and offer it towards an actual pawn broker for physical gold as an exchange. Should you succeed in getting the pawnbroker to exchange his physical stock for your paper stock, congratulations the paper security is valid.
More often than not, it is very unlikely that the pawnbroker would exchange any physical gold for paper ones. For conservative investors, this should be a sign in which they should head towards something tangible.
A popular viral circulation with regards to the periodic table describes characteristics suitable for measurement of value;
3. Non-gaseous state in room temperature
While this might be effective in the hay-days, there are several reasons as to why the world has shifted towards using currencies instead of gold. The main factors are addressed below;
First, the growth rate of gold supply has its inability to catch up with the growth on human potential. The supply of gold will rarely if ever, inflate from year to year. In the meantime, the productivity, discoveries and inventions which are being spun faster and faster year to year garners and demands bigger pay offs for creators. While many investors sees inflation as a negative in regards to their cash holdings, for society as a whole, inflation unlocks and gives way to human potential as a whole. As such, should society conform towards gold being a hard currency, the limitation of growth will be capped to its physical supply. The supply of currency should be allowed to inflate to encourage continued growth, unlocking of new ideas and businesses that spearhead inventions in an increasing pace. Much of society's stalling of growth during medieval times at which gold was used proved that one simply has to be born in the right bloodline to receive riches. This has changed much in the last century.
Noise, simply put, has been an increasing inhibitor for measuring value. Much information from news publications, magazines, e-mails, short messages, ticker symbols and prices are traveled on a split-second basis. Often, the mood for news publications bends towards a negative rather than a positive note. News moods are often dominated by 20% of big discoveries and announcements; examples include Eurozone crisis, pending emerging market fallout, debt ceiling debates. While it is towards an advantage to be aware of such news, rarely do ever, such news destroys underlying value of the hard asset 5 seconds after declaration.
Amidst of the flaws, what could we infer the role of gold in today's and the future? There are several factors in which an investor can establish a perspective to determine if gold is undervalued or over valued. The two factors below observes a mixture of common sense and basic fundamental facts that investors must employ when understanding the role of gold.
1. Cost of mining gold
2. Hard Asset
Cost of Mining
Ignoring all of the "hoola-boola" and focusing on the facts, investors need to be able to answer the question of the cost of mining gold. It makes little sense for mining companies to sell gold stock when the cost of mining them exceeds the market prices. Simple economics dictate that gold will only be sold when the company files chapter 11 or when the market demand causes them to turn a profit by offering higher prices. Common sense should guide the investor with regards to prices of gold. When the cost of mining gold exceeds the market price of gold, it spells an opportune time for investors to pile up stock. As mentioned, prices will naturally adjust towards ensuring the survival of mining companies, no matter how dismal the outlook may be for the sector.
One underlying factor in cost of mining is the fundamental increasing wages throughout time. Time assures that costs will be likely to increase in the long-term, the increase in wages of labor will in effect increase the cost of gold. Apart from demand and supply, the increasing wages of labor to mine gold has an underlying effect of increasing prices of gold.
The second factor involves seeing gold as a hard asset rather than an asset with a different daily price tag. Apart from the key attributes in which gold plays due to its natural element characteristics, it is similar to several assets; labor time and land.
The cost of labor time and land are probably two assets which will forever be of value to every business, small or big. Gold shares similar characteristics of the two as described:
1. Physical Limitation (land)
2. "Branded" Element
Apart from the previously discussed physical limitations of gold, gold has built its reputation as a "safe haven" throughout a history of 2,000 years. From the pages of the bible to "Fill-in-the-blank" flock to gold headlines, there is no other natural element which garners such trust from people. "Trust", after all, is the epitome of the financial notes, lack of trust disturbs the flow and causes panics. With a career spanning and lasting throughout 2,000 years, it is easy to see why "gold" has its reputation as a hard asset.
In summary, there reasons to believe that the world has gone past the point of using gold as the main form of currency. However, as mentioned in the above issues, gold still guarantees its place as a hard asset in both qualitative and quantitative ways. In the unlikely scenario that we unearth another element that matches the career reputation and natural characteristics of gold, stick to it.
Disclosure: I am long GLD. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.