Balaji Viswanathan

How Will Radical Change in Gold Markets Affect Gold Prices?

Wikipedia article on investment says: "Investing is the active redirecting resources from being consumed today so that they may create benefits in the future; " I think in that sense, gold is an investment.

However, as you rightly point out gold is not an investment in the sense of stocks or bonds. In a sense it is as much investment as home - both of them are consumption goods with some speculative factor.

I go with Milton Friedman (and you) and don't support a pure gold standard. But, one good thing about gold standard is the discipline it brings to the regulators. It provides an unbiased indicator of spending and currency dilution. I hate following a schedule or waking up at a designated time, but some times getting a discipline and habit helps. Same thing applies in Macroeconomics. We want choices and don't want to be too restrictive, but at the same time have some structure helps - gold does this for currency.

I would go in for a hybrid, where central banks partly use gold standard in normal economic conditions, but in recessions or other emergency periods they are allowed to relax the standard.


On Mar 04 02:38 PM Asquared wrote:

> As usual, a very thorough analysis Balaji. I’m going to just comment
> on a key word you use to see what yours or others thoughts are. You
> mention the word investment. Is it possible to “invest” in a commodity?
> I know it is semantics, but I’d say the more appropriate word is
> speculating. An investment to me means that the asset earns something
> and has appreciation potential. Gold has a negative earnings characteristic.
> You need to insure it and store it whether it is in a vault in some
> ETF or in your basement safe. The price change appreciation potential
> seems like it can only be based on a demand in the future that is
> greater than supply versus today’s conditions. The supply, unlike
> other commodities, never shrinks. Every ounce mined is still with
> us today. Clearly, if financial Armageddon is upon us, future demand
> could overwhelm supply. But, will we really be so uncreative as to
> try the gold standard again? Seems like much of the Great Depression
> (at least according to Bernanke) can be attributed to being ON the
> gold standard. Getting off of it allowed countries to come out of
> their economic funk. Why would be go back to a failed system w/ that
> knowledge? I mean, I guess I wouldn’t put it past our congress to
> try it again, but logically, we shouldn’t. Thus, “investing” in gold
> can only successfully be done if you believe in the greater fool
> theory, and you get out before everyone else realizes you’re a fool.