Gold's Value In the 21st Century: About As Real As the Myth of El Dorado

That's right, Jim: I don't get gold. The way I see it, the arguments boil down to this: Gold is valuable because it's always been valuable. Well, let's all hold hands and sing Kum-bay-yah.

The weird thing about gold is that I should be in the majority. As you suggest, my argument is the sensible one. But all the smartest people I know love gold, and it obviously has a huge following worldwide. It's like a giant cult, and I haven't been initiated.

The way I see it, gold has historically been valuable as a de facto currency. First, it was currency (think Rome). And until Nixon broke the gold standard, you could trade it for currency. The equation was gold=currency=value.

But like it or not, when Nixon broke the gold standard, that was it; the equation linking gold to value was fundamentally broken. Now, gold is valuable ... because it's pretty? I don't even think it's that pretty. Currency, in contrast, is valuable because it's backed by guns and jails.

Before all you gold bugs start taking shots at me, let me head off a few arguments at the pass.

First, I fully understand and appreciate the risk of fiat currencies. They are paper promises by the government, and central bankers can and will debase them at will. Fed Chair Ben Bernanke looks like exhibit #1 here. I am completely with you on that.

But just because fiat currencies are a bad idea, that doesn't make gold a good one. If you think fiat currencies are bad, buy useful stuff like oil, copper and platinum. After all, that's the stuff you want to buy with all that debased currency. But gold?

I can only think of two reasons gold should rise when a currency is debased:

1) Because it has in the past.
2) Because we're going back on the gold standard.

The first isn't an argument (in a post-Nixon era), and the second is absurd.

Another common suggestion that I find absurd is that gold will be a great store of value during a catastrophe. The problem with that argument is that it only works in a nuclear winter. Anything short of a back-to-the-stone-age destruction of society leaves us right where we are, with fiat currencies and a market for stuff that we pay for with paper dollars. There's no sliding scale between here and there. And if we're talking nuclear winter, my bet is on food and water being more valuable than gold.

For me, gold's value in the 21st century is about as real as the myth of El Dorado.

What am I missing?

Comments

[mslasky:]

Things are worth whatever someone is willing to pay for it (I think that dates back to Karl Marx). The historical demand for gold remains culturally entrenched, while the supply is very limited. Ergo, it has "value". It also remains a touchstone for fiat currency discipline - print too much money and the value of gold denominated in that currency goes up. This brings up the entire issue of how to value "money" itself. A fascinating question.

2007 Aug 16 08:59 AM

[robertkortr...:]

GOLD ok put a piece of gold next to USA $1.00 bill, some how speed up time for 1000 years. Do you see GOLD or do you see the $1.oo bill. GOLD is almost as its properties INDESTRUCTABLE.

2007 Aug 18 08:48 PM

[robert99:]

Eh - You're looking at gold solely as a hedge against inflation... But let's not forget about all those people worldwide that like to wear gold as jewelry, especially India, and to a somewhat lesser extent, China. That's where I consider the base (reliable) demand for gold to be during the next ten, twenty, or thirty years. People like it because it's shiny - It makes no sense to me either... I don't own a piece of jewelry - But as long as THEY'RE interested in it as decoration, I'LL be interested in it as an investment. Inflation? Obviously, that's going to continue to happen, and possibly even accelerate as most large governments continue to create money at better than 10% a year. Once the world's central banks finish selling their gold, it will rocket.

2007 Aug 16 09:45 AM

[hattryx:]

gold can be counterfeited as well. After a nuke winter, would you trust gold? who knows what's valuable and to who? Currency is simply a way around barter. Anything that has widepread use or is generally accepted as valuable can be used. Gold is rare and long lasting, therefore valuable.

2007 Aug 16 10:14 AM

[Malkiel:]

Some of the correspondants here brought up the point that they don't believe in the monetary value of gold but, so long as others do, it must be so. The problem is, during the February market downturn and again during the current downturn Asian investors, whom we are assuming are the naive folks who still believe in the monetary value of gold, didn't buy it. I think the monetary value of gold at this point is confined to a pop-culture segment of the US population (including our Maybach "man of the year" Eric Bolling on Fast Money) and the rest of us see the wisdom of Robert Lichello's observation that in nuclear winters only cigarettes, soap, booze, and chocolate have investment value...

2007 Aug 16 10:30 AM

[David Lentz:]

Another perspective is that you are correct, it's not a currency, it's a commodity. A commodity that is pretty much universally exchangeable for the currency of your choice, as any commodity is, but one that is nicely priced, and does not decay with age as soybeans or pork bellies will.

And given its lengthy history and association with currencies, it's very easy to view it as a safe haven when paper currencies are all suspect, such as times of economic chaos or global inflation (and last week's central bankers injecting billions to inflate their systems in the wake of an unknown impact from the US sub-prime mortgage fiasco is good cause to be concerned about future inflation).

That said, in the end it's just another commodity, and as such a place to try and escape inflation. Supplies are not quickly changed, but can be altered by mining and central banks dumping their gold reserves. The fact that central banks bother to maintain gold reserves says more about gold's perception as a "store of value" (I know, it's a joke -- smile!) than anything else.

The only thing that will shoot gold into the stratosphere is continued debasing of currencies as a strategy to accommodate out of control government spending, and that seems to be still in vogue.

Where is Paul Volcker when we need him?

2007 Aug 16 10:36 AM

[aerius:]

Are you serious? How many tons of copper and how many barrels of oil are you going to store in your safety deposit box or in your basement.

To reiterate the above, it’s a physical good that has shown that it can retain value well.

2007 Aug 16 11:43 AM

[Josh Stern:]

Some people above mentioned the fact that gold was traditionally the investment of choice for common folks in India. One question that I don't know the answer to is whether that source of demand will increase or decrease as India emerges economically.

I do agree with the author that gold is not safe as a hedge of last resort. Diversifying across all currencies and asset classes is the hedge of last resort because everything can't decline relative to everything else.

2007 Aug 16 12:05 PM

[davcnslt:]

No simplke answer here. However, I think your gold=currency=value is, as you probably intended, false. At one time we could say currency=gold=value but again, you are correct, that is gone.

The answer comes at least partially from Robert Bohrer's comments as to the vaue of Gold in jewelry, especially in Asia. (Gold sees little use as a manufacturing material other than in jewelry). It is a defactor currency, or wealth asset to millions here.

The lustre of gold is not going to go away, perhaps because of it;s illogic rather than in spite of it's illogic.. I would add gold to the wisdom of Robert Lichello's observation that in nuclear winters only cigarettes, soap, booze, and chocolate have investment value. (as reiterated above by Malkiel). There will always be those that will sell you these things if you have gold in my opinion. Incidentally, I also would have added condoms to Lichello's list.

2007 Aug 16 11:18 PM

[Steven Johnson:]

These Comments are insane at best !!!!!!!!!! This guys crazy !!!!!!!! Gold always has been tied to the Monetary Markets and has only been hit by the Downdraft by the DOW. Silver is an even better investment at this moment and Palladium is Exceptional. India and China love Gold and always will. There are many factors driving gold at this moment in time. Alternative fuels are also a Great investment. Check out Silverado Goldmines {Symbol: SLGLF } Get the best of Gold and Alternative fuels in a Government Grant backed Company. This Company needs a little time to get rolling but is Congresses little baby with a great clean burning coal idea, that is sure to take off with 250 years worth the coal reserves in the US alone. A great long term stock with huge potential that also got caught in the downdraft and should be bought now while its down this week. It only has one way to go and thats way up.

2007 Aug 17 10:20 AM

[ratsharp:]

the reality of gold in india is that it serves as a common denominator during marriages. As long as traditional marriage system exists , the need for gold will. Since the benefit of the economic boom is accruing to the nouveau rich, their instinct as naive investors and consumer is to opt for gold.
The upper rich and the traditional hoarders of gold do consume gold ( only as investment) ... men always wore a gold chain ..( usually nothing more) ..older women still wear it ( sometimes overdo it) ... but the interesting part is that the current gen has little or no interest in the ornamental value ...as they move to diamonds/ruubies./gems etc.
net: the demand for gold will continue , peak as the developing countries grow and then taper off to the lows.
the gold standard et al is past .. the future standard will require assets . and it could be other alternative assets ( a small part of which will be gold) . The only reason when i see the stratosphere of gold is when the supply concentration shifts evenly between central banks and the so called "retail". thats the crucial turning point.

2007 Aug 17 01:48 PM

[scotty295:]

Gold! The once and future money! Dating back to the dawn of time! Having been placed in conjunction with as meager a commodity as salt,seashells,rice,wa... It's scarcity(only 155,000 ton extracted from the bowls of the earth since the dawn of time) and having lost close to 9% since then, sorta puts it in a class all by it's self, especially since it has become more expensive to mine it and we are unable to keep up with it's demand on a yearly basis! The fact that very few alternatives on the face of old "mother earth" can hone up to Gold's ability to be a "store of wealth" and that these "other alternatives" have never been the "real money" from the dawn of time,sorta sums up to me that gold,and it's "sister",silver, has been and will always be, the "Real Money"! Fiat money systems have been proven time and time again to corrupt a nations economic stability! From a colossal empire such as Rome to and through the devastating hyperinflation of the Wiemar republic of 1921/23 Germany! Alchemists have not been able to re-create it and no other metals can stand beside it (maybe silver) with it's ability to withstand "Old Father Time"! I will continue to "Swap" the worthless USD for gold in a "New York Minute"!!! D.L.Scott.. [e-mail]

2007 Aug 17 07:26 PM

[Living Off ...:]

Gold is a hedge against prosperity.

the US is bankrupt.

I spent $13 dollars to buy 16 rolls of toilet paper. When the cost to them become more than
$16 (and it will) toilet paper will be more valuable that your precious dollar.

You can wipe your ass will your dollars, i'll stick to gold.

2007 Aug 18 12:46 PM

[Katy Delay:]

I agree with Scotty295 and NiravDesai. And to answer Matt's query "What am I missing?", I will simply reinterate my mantra:

"You can take gold out of the standard, but you can't take the standard out of gold." - Katy Delay

In other words, gold may not be the official standard bearer in the eyes of the central bankers, but it will always be so for the people. And that's just the way it is, folks.

2007 Aug 19 06:18 PM

[misterchan:]

Hello, Matt Hougan, Your thoughts were interesting and so were everybody else's. During the last year and one half,I have been tossed back and forth by my gold stock investments. Big swings up and down. Especially the last three weeks. So, unlike the other commentators who say you are crazy, I do not. But you asked what you were missing, and if we concentrate only on the present, I can answer that reaching-out question. In 2001 I bought some gold coins for $440 each. A couple of days ago they were worth more than $880 each. So if you determine how many dollar bills you had in 2001 and how many gold coins you would have bought, you will immediately see, in dollars, what you are missing. Also, if you remember how much cash you had in 2001, you would have at least twice as much today if you had invested the total amount in those gold coins. As for gold stocks, believe me, youare not missing much, unless, like me, you had bought them.Beverly Albins aka misterchan.

2007 Aug 20 01:51 AM

[jaybny:]

I agree gold has no real value... that is if you value it against something with intrinsic worth like food, water, oil etc.

However in an catastrophe, when valuing Gold against paper-currency, Gold world be worth trillions of times more then the paper-currency. Yes water, and food would be worth much more then gold against paper-currency..

However you cannot store water and food while waiting for the catastrophe. Gold is great at long term storage and can be passed on to future generations.

This is where gold gets its value.. from the fact that it would be the most valuable currency in place of bartering during the catastrophe. In fact during a catastrophe, new paper currency will be created that will be backed by gold.. and the cycle will repeat itself.

If you had a trillions of dollars and wanted to pass it down to multiple generations how would you do this? Paper currency needs to be managed.. gold just needs to be protected.

Gold gets its current value from the probability of imminent catastrophe. Once the catastrophe hits.. you will no longer be able to buy gold will all your trillions of dollars. As the probability rises, people start buying gold to beat the rush. As the probability decreases people sell their gold in order to use currency for investments.

Mar 29 03:51 PM