Why buy gold?

[rick_v]

Great Article out today about Tom Kaplan one of my favorite gold investors of all time!

 

http://www.businessweek.com/magazine/content/10_36/b4193058839907.htm

[shalab]

One should read Ben Franklin's autobiography about currency and his thinking about this topic.  Franklin thought about this problem and came up with a solution. A lof the arguments made by hacks today can't match the genius of Franklin, a great polymath and practical person who lived in the 1700s.

 

He started the first franchise ( printing press ) in the US, understood the magic of compounding, the importance of education/training, a rebel who fixed the errata in his life, a true democrat who had no trouble inviting the imam from istanbul to Pennsylvania,  who gave away his inventions without patents for the good of the world, figured out the monetary policy, learned several languages and is in the world chess hall of fame!

 

Anyone who is an investor must read Franklin's autobiography and his biography - a remarkable person who achieved much and stands out among the founding fathers of the United States.

 

cheers!

Shalab

[Eric50]

Another good article on gold in the Financial Times. What I find interesting is that China is now the largest producer of gold and it quietly buys all the gold that it produces. Rogoff mentioned for this article that "Emerging market central banks will probably want to raise the share of gold in their foreign exchange reserves, bringing them closer in line with advanced country central banks."

 

http://www.ft.com/cms/s/2/e9378c6c-b0b8-11df-8c04-00144feabdc0,dwp_uuid=a712eb94-dc2b-11da-890d-0000779e2340.html

 

[ERICOPOLY]

5.3 billion troy ounces -- global supply of gold

6,700,000,000 -- global human population

 

There is 8/10 of an ounce of gold per person.

 

$9,117 -- global GDP per capita 2008  (don't have more recent figure)

 

So, on a gold standard, each person in the world has a maximum cash supply of $960 (if all gold were equally distributed as coin).

 

I'm not an economist of course.  But would global GDP fall if the global money supply were roughly 1/10 of global GDP?  

 

Once I get my $960 and allocate 100% of it to the family budget, how do I have room to purchase more things next year if somebody invents a new widget?  Is there room for a new widget?  If no money available for new widgets, does this deter innovation?  

 

Final question -- has fiat currency changed the pace of innovation?  I really don't know -- but it's something I wonder about.

 

 

If gold were cash and allocated equallly to each of the world's inhabitants, the US buck would have zero value and all your measures of GDP would be in goldgrams or ounces- the yardstick would have changed. Because the total wealth of the world can be measured in US dollars now, there is no need to actually have that many dollars in existence.

There is no claim that the gold is the only store of wealth, there are others - barrels of oil,  bushels of wheat, acres of farmland, but gold alone amongst all the commodities has been used as money, because of its high intrinsic value, its finite supply (cannot be inflated), its indestructability and its portability. It is used as the ultimate store of wealth and indeed is used as a partial backing of all major currencies. It has the same convertible value in India, Peru, Timbuktu and Wall Street. Either you get it or you don't.

 

I think every "gets it" if you are going to make those kinds of statements.  Does anyone think dollars would have value if the world abandoned it and went to gold coin?  Who here doesn't realize that gold is traded in Timbuktu, India, and Wall Street?  Did anyone say that gold is the only commodity?  

 

That had nothing at all to do with what I wrote.

[niels12think]

To me it seems that gold is in a bubble. My thinking is that silver has the same characteristics as gold (plus some additional). Silver have been used since the beginning of time as a currency, and even in so called gold based currencies, it would mostly be silver coins that were actually used as a means of normal payment. The total silver ever mined would fit into a cube with sides measuring 55 meter as opposed to golds's 20 meter. So both historically and naturally there is a relation between gold and silver. For thousands of years the ratio was in the range 10-20. Now the ratio is 65. This indicates to me that gold is in a bubble even when measured "on it's own terms" so to speak.

 

Btw, Even the US dollar started out in 1792 to be defined as 27grams of silver, with an eagle (10 dollar) defined as 17 grams of gold pegging the ratio of gold and silver as approx 17. http://en.wikipedia.org/wiki/United_States_dollar

 

Allthough I'm convinced that gold is in a bubble, i'm equally convinced that the bubble might get bigger  :'(

 

Cheers

 

[niels12think]

The total silver ever mined would fit into a cube with sides measuring 55 meter as opposed to golds's 20 meter.

 

Looked a little more into it. According to other sources, the cumulative amount of silver ever mined is approx. 45 billion ounces, which would fit into a cube measuring 45 meters on each side. I.e. approx. 10.5 times the amount of gold ever mined.  Link: http://www.gold-eagle.com/editorials_05/zurbuchen011506.html

On top of this, it seems that the percentage of silver irrevocably lost (consumed in production etc. and not available for recycling) per year is significantly higher than for gold.

 

Cheers!

[Guest broxburnboy]

 

That had nothing at all to do with what I wrote.

 

Forgive me, but I can't see your point and I am trying to understand your point of view.

No one is claiming that gold is the ONLY store of wealth and that the only capital anyone can have is there personal 3/4 oz of gold.

However, gold, alone amongst the physical stores of wealth such as corn, oil, acres of forestland, farmland, intellectual property et. etc. has all the qualities that makes it ideal for use as MONEY. Indeed throughout history it has been used as such.

It has intrinsic value (this seems to be the main point of contention in this thread), it is globally accepted as money because it has the following characteristics: portability (this eliminates land and such commodities as barrels of oil as candidates for money), purity (one gram of gold is as pure as any other), it is virtually indestructable and above all it cannot be inflated as can any fiat money (commodity future contracts, sovreign promises to pay, monetized debt etc.).

When fiat money eventually is inflated as it invariably will to the point of paying of past debt with new debt, gold regains its appeal to creditors who wish to be reimbursed with uninflated money.

It seems to be lost on a lot of people, that at today's current yields, sovereign debt instruments are guarantees to lose money going forward as their yields do not make up for the capital loss due to inflation. That is why gold has "outperformed"  in terms of debased currencies....

[niels12think]

However, gold, alone amongst the physical stores of wealth such as corn, oil, acres of forestland, farmland, intellectual property et. etc. has all the qualities that makes it ideal for use as MONEY. Indeed throughout history it has been used as such.

It has intrinsic value (this seems to be the main point of contention in this thread), it is globally accepted as money because it has the following characteristics: portability (this eliminates land and such commodities as barrels of oil as candidates for money), purity (one gram of gold is as pure as any other), it is virtually indestructable and above all it cannot be inflated as can any fiat money (commodity future contracts, sovreign promises to pay, monetized debt etc.).

...

That is why gold has "outperformed"  in terms of debased currencies....

 

Actually, silver has the same characteristics. Seems to me the performance can't be explained purely by the characteristics. How come gold has "outperformed" silver then ?

 

Cheers

[ERICOPOLY]

 

That had nothing at all to do with what I wrote.

 

Forgive me, but I can't see your point and I am trying to understand your point of view.

No one is claiming that gold is the ONLY store of wealth and that the only capital anyone can have is there personal 3/4 oz of gold.

However, gold, alone amongst the physical stores of wealth such as corn, oil, acres of forestland, farmland, intellectual property et. etc. has all the qualities that makes it ideal for use as MONEY. Indeed throughout history it has been used as such.

It has intrinsic value (this seems to be the main point of contention in this thread), it is globally accepted as money because it has the following characteristics: portability (this eliminates land and such commodities as barrels of oil as candidates for money), purity (one gram of gold is as pure as any other), it is virtually indestructable and above all it cannot be inflated as can any fiat money (commodity future contracts, sovreign promises to pay, monetized debt etc.).

When fiat money eventually is inflated as it invariably will to the point of paying of past debt with new debt, gold regains its appeal to creditors who wish to be reimbursed with uninflated money.

It seems to be lost on a lot of people, that at today's current yields, sovereign debt instruments are guarantees to lose money going forward as their yields do not make up for the capital loss due to inflation. That is why gold has "outperformed"  in terms of debased currencies....

 

Regarding my point of view...

 

In a word: scalability.

 

I'm exploring the limitations of a finite supply of money.  It is desirable to have the supply of money grow with the needs of the economy, however it is not desirable for it to be abused.

 

So there is some benefit that fiat money brings to the table that gold could not provide, yet it's difficult to keep the leaders from abusing the ability to create new money.

 

Galbraith's book you recommended Money: Whence it Came, Where it Went pointed out that a moderate degree of inflation is desirable.

 

 

 

[ERICOPOLY]

It seems to be lost on a lot of people, that at today's current yields, sovereign debt instruments are guarantees to lose money going forward as their yields do not make up for the capital loss due to inflation. That is why gold has "outperformed"  in terms of debased currencies....

 

Yes I think that's true about the yields -- especially the after-tax yields vs inflation.  I was born in 1973 and I'm conditioned to expect rising prices every year -- I wonder why people don't see the math.  I think people who buy the 30 year treasury instead of the 30 yr TIPs are reaching for yield -- they're speculating that there will be a big deflation scare that will net them a huge  capital gain, but they take a risk.

 

One can buy TIPs as a store of CPI-linked value.  The crime is that the CPI adjustments are taxed as capital gain -- a fix to that tax issue would make it a quite reasonable store of value, after accounting for the yield.  There are accounts (IRAs) where that is a non-issue.

 

TIPs pay a yield and if you think of the yield as making up for a possibly underreported CPI, then it actually holds value relatively well in the face of consumer price inflation.

 

 

 

 

 

 

[Guest broxburnboy]

 

That had nothing at all to do with what I wrote.

 

Forgive me, but I can't see your point and I am trying to understand your point of view.

No one is claiming that gold is the ONLY store of wealth and that the only capital anyone can have is there personal 3/4 oz of gold.

However, gold, alone amongst the physical stores of wealth such as corn, oil, acres of forestland, farmland, intellectual property et. etc. has all the qualities that makes it ideal for use as MONEY. Indeed throughout history it has been used as such.

It has intrinsic value (this seems to be the main point of contention in this thread), it is globally accepted as money because it has the following characteristics: portability (this eliminates land and such commodities as barrels of oil as candidates for money), purity (one gram of gold is as pure as any other), it is virtually indestructable and above all it cannot be inflated as can any fiat money (commodity future contracts, sovreign promises to pay, monetized debt etc.).

When fiat money eventually is inflated as it invariably will to the point of paying of past debt with new debt, gold regains its appeal to creditors who wish to be reimbursed with uninflated money.

It seems to be lost on a lot of people, that at today's current yields, sovereign debt instruments are guarantees to lose money going forward as their yields do not make up for the capital loss due to inflation. That is why gold has "outperformed"  in terms of debased currencies....

 

Regarding my point of view...

 

In a word: scalability.

 

I'm exploring the limitations of a finite supply of money.  It is desirable to have the supply of money grow with the needs of the economy, however it is not desirable for it to be abused.

 

So there is some benefit that fiat money brings to the table that gold could not provide, yet it's difficult to keep the leaders from abusing the ability to create new money.

 

Galbraith's book you recommended Money: Whence it Came, Where it Went pointed out that a moderate degree of inflation is desirable.

 

 

Galbraith, whom I deeply respect, was a Keynsian and did indeed think that a moderate inflation is acceptable as it the necessary result of government fiscal stimulus, the backbone of Keynsian theory.

Keynes was not however a monetarist, the wholesale tampering with the money supply and interest rates came later with Milton Freidman, supply side economics and the "maestro" Alan Greenspan, who clearly abused the growth of the money supply to the point that deficit spending is now a permanent government policy and CANNOT be reversed. Debt is now paid off by diluting the money supply, the other alternative - raising taxes to balance the budget and stopping malinvestment - is not on the agenda.

When fiat currencies degrade, the fiat exchange rate to gold reflects the extent of the dilution and the general level of fear of default. If and when hyperinflation arrives, the exchange rate to gold skrockets suddenly with the death throws of the currency. a la Zimbabwe. At the end of the day it may take one trillion dollars to buy a man's fine suit, but it will always cost about ounce of gold.

[ERICOPOLY]

At the end of the day it may take one trillion dollars to buy a man's fine suit, but it will always cost about ounce of gold.

 

Except for earlier this past decade (and no doubt some future point in time) when an ounce of gold couldn't buy you 1/2 of a man's fine suit.

 

TIPS didn't have that issue -- less volatility.  TIPS are only as good as the government's guarantee though -- some degree of risk to that.

 

[oec2000]

for what it is worth, it is hard to buy gold as a value investor. "We" normally like to buy the present value of $1 for $0.50. It is hard to buy without knowing what the IV or present value is. It is especially hard buying something that probably does not have a lot of personal utility value. Most of us are cheap skates + only after we get enough pressure from our wives that we breakdown + maybe buy some jewelery (I can t even spell it).

 

Haha, that's funny. I'm a cheapskate too but the way to think about gold is not to compare it with stocks. Think of it as a currency. Even value investors hold currencies sometimes. So, gold can be a good currency if you think govts are going to debase their currencies. If you were Zimbabwean, you would be very happy to hold gold as a currency. If you believed that Bernanke might take QE to crazy levels, you too might see the wisdom of converting USD to gold. Some people assume that stocks will give you protection in the event of a currency collapse. I'm not sure this is the case at least in the initial stages of a collapse. Certainly, Asian stock markets cratered when they had their currency crisis in 1997/8 and I think Turkish stocks also suffered for a while when they had their bouts of currency depreciation.

 

Another point to consider: Not everyone invests in stocks or has 100% of their financial assets in stocks. These people hold cash or some fixed income equivalent. If there is a crisis of confidence in the major currencies, might these people switch into gold?

 

The issue is not black and white because we live in interesting times of unusual financial stress. I don't have the answers but I'd like to have some insurance if I can.

 

 

[biaggio]

oec 2000,

 

I see and agree with your points.

 

It seems to me that as a value investor, it is hard to think of timing the gold market.

 

Check out the following video on gold as a currency ( I previously posted last year)

 

http://www.youtube.com/watch?v=Gk5aRIz17fk

 

"Mark Dice tries to sell $1100 one ounce gold coin for $50; no takers."

 

 

 

 

[oec2000]

So, on a gold standard, each person in the world has a maximum cash supply of $960 (if all gold were equally distributed as coin).

 

I'm not an economist of course.  But would global GDP fall if the global money supply were roughly 1/10 of global GDP? 

 

Once I get my $960 and allocate 100% of it to the family budget, how do I have room to purchase more things next year if somebody invents a new widget?  Is there room for a new widget?  If no money available for new widgets, does this deter innovation? 

 

Final question -- has fiat currency changed the pace of innovation?  I really don't know -- but it's something I wonder about.

 

 

The problem is we are conditioned to think in terms of today's dollars - which is why $960 seems so little. If there had been no monetary inflation in the past 100 years, $960 today would be equal to $960 back then and it would buy you a lot more.

 

Also, you must not ignore the ability of banking system to create credit/money - think about the currency to money supply relationship. Even with fiat money, we do not need $15tr of physical USD notes to support a $15tr economy.

 

If you think about it, we were on the gold std (or is it the gold exchange std?) up to 1973. The gold supply then was not materially different from now - it did not cause any problems in the functioning of the economy.

 

In any case, we could always add another rare commodity as "currency" if gold supply was too limited. The only requirement would be that it cannot be created too easily by irresponsible govts. Even IMF Special Drawing Rights (SDRs) would work it we could be confident that the supply can be properly controlled.

 

As to your question about innovation, I suspect that it is driven more by human need and free markets and that fiat money has little impact on it.

[oec2000]

Check out the following video on gold as a currency ( I previously posted last year)

 

http://www.youtube.com/watch?v=Gk5aRIz17fk

 

"Mark Dice tries to sell $1100 one ounce gold coin for $50; no takers."

 

 

Well, wasn't that a good indication that we were not yet in a bubble last year? :) I wonder what the result would be today.

 

Agree with you about the difficulty of timing when to buy gold. That's why I'm looking for an way to a low risk way to play the upside.

 

Another thought that just came to my mind. People always talk about a gold bubble but never about a USD bubble. If you think of gold as a currency - all currencies have no intrinsic value and they can only be valued in terms of other currencies - then why can't we see the USD as in a bubble instead of the other way round? If the USD is in bubble, then gold might just be cheap! ;D This is not so heretical a view, imo.

[oec2000]

So, on a gold standard, each person in the world has a maximum cash supply of $960 (if all gold were equally distributed as coin).

 

 

Another way to look at it. Your statement could, in effect, be used to argue that gold should be valued much higher. If gold were valued at $10,000, then we would have a cash supply of $10,000 per person. This demonstrates the fallacy of measuring value using a fiat currency.

[ERICOPOLY]

So, on a gold standard, each person in the world has a maximum cash supply of $960 (if all gold were equally distributed as coin).

 

 

Another way to look at it. Your statement could, in effect, be used to argue that gold should be valued much higher. If gold were valued at $10,000, then we would have a cash supply of $10,000 per person. This demonstrates the fallacy of measuring value using a fiat currency.

 

Broxburnboy said that one ounce of gold should purchase a fine man's suit.  

 

Now, if you revalue gold like you suggest then it would purchase several fine men's suits.  So the store of value would be proven unstable.  Based on his men's suit metric, gold today is accurately priced in dollars -- he claims this value has been a truism for a hell of a long time.  Thus it's only $960 per person I'm afraid to tell you.  The day that gold hit's $10,000 is the day that fine men's suit hits $10,000.  We're not there yet based on suit prices.

 

To quote him:  "it will always cost about ounce of gold".  (referring to the fine man's suit).

 

[Guest broxburnboy]

So, on a gold standard, each person in the world has a maximum cash supply of $960 (if all gold were equally distributed as coin).

 

 

Another way to look at it. Your statement could, in effect, be used to argue that gold should be valued much higher. If gold were valued at $10,000, then we would have a cash supply of $10,000 per person. This demonstrates the fallacy of measuring value using a fiat currency.

 

Broxburnboy said that one ounce of gold should purchase a fine man's suit.  

 

Now, if you revalue gold like you suggest then it would purchase several fine men's suits.  So the store of value would be proven unstable.  Based on his men's suit metric, gold today is accurately priced in dollars -- he claims this value has been a truism for a hell of a long time.  Thus it's only $960 per person I'm afraid to tell you.  The day that gold hit's $10,000 is the day that fine men's suit hits $10,000.  We're not there yet based on suit prices.

 

To quote him:  "it will always cost about ounce of gold".  (referring to the fine man's suit).

 

 

Huh?  We can just as well say that the GDP of the planet is about 1 trillion bushels of wheat. That doesn't mean that there has to be a trillion bushels of wheat in inventory somewhere- its just a unit of measure. Neither does it mean that our trillion bushels of wheat comprise the total capital of the whole planet.. I find this line of reasoning absurd... and I still can't figure out what it is you are trying to say. I guess your point is that gold is worthless or close to it and we should  stockpile the US dollar instead.

Good luck with that, I'm going with the gold.

[Myth465]

I believe he is saying that a currency needs to grow as wealth does, and gold is not likely to keep up due to it being so scarce. Its a pretty simple argument.

 

I dont think you will find even 1 person on this board who thinks holding dollars is a viable investment option so you can drop that straw man. Also as he said a little inflation keeps the masses at ease, even I (who I consider fairly intelligent) likes a 3 percent raise year over year. I would be pissed if the CEO or CFO said the currency is stable and there is no inflation so we decided to keep your earnings flat.

[Guest]

To me, there is very little doubt that over the next 50 years, gold will continue to appreciate against the USD or any other currency. However, I'm not so sure what will happen over the next year or two.

[watsa_is_a_randian_hero]

I am short gold.

 

Gold is just as much of a fiat currency as the US Dollar or any other currency.  Nothing backs gold, it pays no interest, pays no dividends, produces nothing, and selling it at a higher price is dependent up a "greater fool."

 

 

If you beleive that Gold and Silver are intrinsically worthless, please explain why the dollar value of silver coins withdrawn from circulation in the 70's have increased in fiat price by a factor of about 10.... according to your theory they should have dropped and should now be virtually worthless.

Also please explain why the IMF, the Federal Reserve and most central banks hoard their gold as assets to back their currency. They should have dumped their gold ages ago since it is worthless and creates no real return.

 

 

I do not think Gold and Silver are intrinsically worthless.  I just feel the intrinsic value for gold is far less than the current market price and could be estimated by its industrial use value.  Silver trades much more in line with its industrial use value.

[Guest broxburnboy]

I believe he is saying that a currency needs to grow as wealth does, and gold is not likely to keep up due to it being so scarce. Its a pretty simple argument.

 

I dont think you will find even 1 person on this board who thinks holding dollars is a viable investment option so you can drop that straw man. Also as he said a little inflation keeps the masses at ease, even I (who I consider fairly intelligent) likes a 3 percent raise year over year. I would be pissed if the CEO or CFO said the currency is stable and there is no inflation so we decided to keep your earnings flat.

That's the problem with fiat currencies of course- how do you measure new wealth- and how do you stop central banks and governments from abusing the creative powers? What happens to the currency if national wealth is decreasing through the ongoing collapse of speculative bubbles, negative balances of trade and  malinvestment?  There is no mechanism to uncreate the new dollars to keep the value of your currency constant. The printing press does not have a reverse gear. What happens to the value of the currency when the printing presses are instead, fired up during such times?

Fiat currencies are revealed as another depreciating IOU and trade at an every widening discount to their original pegged-to-gold value. Think 1972 to the present.

 

[oec2000]

I believe he is saying that a currency needs to grow as wealth does, and gold is not likely to keep up due to it being so scarce. Its a pretty simple argument.

 

I dont think you will find even 1 person on this board who thinks holding dollars is a viable investment option so you can drop that straw man. Also as he said a little inflation keeps the masses at ease, even I (who I consider fairly intelligent) likes a 3 percent raise year over year. I would be pissed if the CEO or CFO said the currency is stable and there is no inflation so we decided to keep your earnings flat.

 

If you read Ericopoly's original post, he compares the stock of gold to money supply to argue that there is not enough gold to support current world GDP. The more appropriate comparison should be gold vs. currency notes in circulation. His suggestion that if each of us only had $960 of currency (in his example, gold coins), we could only spend $960 is incorrect because it does not take into consideration credit creation and the velocity of money. Most people do not carry around close to $960 cash in their wallet all the time. So, if we can manage with only $200 (or whatever amount it is we keep in our wallets), surely $200 worth of gold coins would be more than enough. The argument that gold is too scarce is not a good one.

 

In any case, Broxburnboy is not necessarily advocating that gold should be the only currency. He is simply saying that it is better than fiat money because its supply is not subject to the whims of politicians and central bankers.

 

As to your point about wage inflation, I believe that that the lower income groups in US have had virtually no increase in real wages in the past 2 decades (I'm not sure what the precise period is). Do you think they feel better because their nominal wages have gone up during this time? The bigger danger is if govt policies result in runaway inflation - real wages would likely fall in that scenario..

 

Gold has the disadvantage of supply being totally dependent on our ability to find it but it protects us from debasement. Fiat money has the advantage of flexibility to grow with the economy but it is subject to abuse by politicians. The question is which of these two is the lesser evil.

 

 

 

[ERICOPOLY]

 

That doesn't mean that there has to be a trillion bushels of wheat in inventory somewhere- its just a unit of measure. Neither does it mean that our trillion bushels of wheat comprise the total capital of the whole planet..

 

It is a unit of measure -- yes.  However, the scarcity of gold comes into play when an ounce of it is only enough to purchase a man's fine suit, and there is only 1 ounce per person worldwide.

 

Are you suggesting that if gold were used as the world's currency then there need not actually be any gold in the vault?  We already have that (possibly) here in the US (we'll see if Ron Paul gets his audit).  

 

Or rather, how much gold (fractionally) needs to be in the vault to back a given unit of measure.  I initially asked the question of whether one ounce of gold per capita can support a level of GDP ten times that measure.