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.

The Case Against Gold

Bruce,
You make a point that gold will go down because the consumers don't have money. Annual gold production is of the order of 2000 tons, and at today's value it will be in the ball-park of $50b. This is the entire amount of gold produced. Compare this to the trillions of US treasury that has been issued. Even if 1% of regular treasury buyers move into Gold that can flood the gold market and I have the data that it is already happening. As I wrote in my article today, the market is undergoing a radical shift moving away from Jewelry buying customers to Bar& ETF buying investors. You didnt account for this shift. $400 might be a big thing for customer looking for food, but not so much for an investor who has thousands in other instruments and wants to use gold as a hedge.

Given this shift, I would say gold is still good for short to medium term investors, but long term investors (who wants to hold for more than 3 to 5 years) should consider profit booking whenever gold reaches near $1000 range.