Gold... Huh! What Is It Good For?

[Bingley Bloke]

Okay... It's widely accepted that the price of Gold is rising as people throw money at it to capitalise on the almost inevitable spike that will be caused when the Western Central Banks finally cover the ever-losing short position that they have so naughtily run up to keep inflation down... Or something like that.

Anyway, during my studies into this I've learned that people tend to put their money into Gold during hard times, when all other investment vehicles are shot to pieces. But why?

My logic wants to know why something that is used to make the most pointless of luxury goods is seen as a sensible buy at times when the world is at its most messed-up... ie, when food, water and shelter are the only things of any real significance to anyone, not nipping down to Harrods for a new Rolex.

Clearly there is an explanation or the world's most savvy investors wouldn't buy gold when they feel hard times are just round the corner, but I don't know what this explanation is. I want to learn!

Edited February 9, 2006 by Bingley Bloke

[Guest]

Because it's recognised as an alternative form of money?

[JohnnyLaw]

Just type "gold store of value" (eg.) into Google

[gone west]

google "fiat currency"

[MarkG]

But why?

Because for thousands of years it's been the one thing that held its value when all else failed. That's no guarantee that it will in future, but a fairly strong hint.

[Perfectionist]

Its cos women love the stuff (along with diamonds) which means men will want to buy it to give to them, so they can get laid ..... see its quite simple really

[shedders]

Its cos women love the stuff (along with diamonds) which means men will want to buy it to give to them, so they can get laid ..... see its quite simple really

You must be a money grabbing tart like all the women in my family excepting my lovely daughter.

[last ninja]

Gold doesn't ask you your mother's maiden name.

[cgnao]

Capital always flows towards the most productive assets. But when ALL assets are overvalued, capital will have a tendency to wait for asset prices to fall to acceptable levels.

But waiting in paper cash is suicidal, because paper cash is continuosly debased by governments. Here enters gold, which is true money. It does not yield. It just holds value. The ideal refuge for capital until asset prices correct. When they do, capital will abandon the safety of gold and will start to be invested again in undervalued productive assets.

Look up "dow gold ratio" on google for more.

[fishface]

Capital always flows towards the most productive assets. But when ALL assets are overvalued, capital will have a tendency to wait for asset prices to fall to acceptable levels.

But waiting in paper cash is suicidal, because paper cash is continuosly debased by governments. Here enters gold, which is true money. It does not yield. It just holds value. The ideal refuge for capital until asset prices correct. When they do, capital will abandon the safety of gold and will start to be invested again in undervalued productive assets.

Look up "dow gold ratio" on google for more.

But when the FTSE and dow where higher in 01 what was the price of gold? Wasn't it lower than it is now? Also how can you say it holds value when it spent over 5 years at such a low price?

[Flick]

My logic wants to know why something that is used to make the most pointless of luxury goods is seen as a sensible buy at times when the world is at its most messed-up... ie, when food, water and shelter are the only things of any real significance to anyone, not nipping down to Harrods for a new Rolex.

In the unlikely event we do run into a mad-max scenario, I beleive someone with an excess of food or water are rather more likely to accept a shiny kruggerand in exchange for it than a bunch of worthless notes.

[Mr_Sminty]

If we are in for deflation then surely Government bonds are the best way of preserving wealth with a guaranteed 5% gain return?

If we are in for hyperinflation, then why not just switch to a more stable currency?

You can go on about gold having some kind of "real" value that permates the very fabric of the universe but rationally that has no real basis, however for some reason people have coverted gold since 1000 BC or whatever and it still has that allure of desire and hence demand and as acceptable exchange for goods.

Money is just a medium for the exchange of goods and assets ultimately, there are very few people in the world who could hole up in a bunker with a pallet of gold or who could likewise trade it in for food in a nuclear wasteland, as such under less extreme circumstances it still is open to confidence placed in it to buy things much like "fiat" currency

As a store of wealth etc that has some argument but then any asset is subject to demand and confidence that it can be exchanged. If the pound is to fall by x amount then gold should raise by x if linked to the value of real goods they can both purchase. However if demand for gold pushes this price above such a correlation to the pound then surely one will be overpaying for this protection agains devaluation, in say 3 years time you will be in the same net position in the amount of goods you can purchase with your gold or if there is a gold bubble actually less (albeit this might be a better choice than doing nothing).

Surely the best place to put your money as at any time is by putting it to some use in those 3 years in which in real terms it will grow, say by investing in a local company, buying stab vests and flogging them in the upcoming social breakdown etc or other such ilk. Of course this is idealism and the huge impact of the markets mean that it might be safe to follow the herd and dissert equities and go in to gold as just the easiest option.

Im yet to be convinced on gold but Im seriously considering it if I can come up with some better thought out arguments than sayings such as gold is "real money", this in my opinion this is akin to "rent is dead money", to convince myself. If I miss out thats my bad choice, but I dont belileve one can go through life by going on others decisions (least of all anon web forums), and I really dont understand enough about gold currently or have faith in the predictions it will be the only method of surviving in the coming years. Im also quite lucky I suppose in not having much in the way of cash and assets so meltdown will not make much difference to me either way

[oracle]

Capital always flows towards the most productive assets. But when ALL assets are overvalued, capital will have a tendency to wait for asset prices to fall to acceptable levels.

But waiting in paper cash is suicidal, because paper cash is continuosly debased by governments. Here enters gold, which is true money. It does not yield. It just holds value. The ideal refuge for capital until asset prices correct. When they do, capital will abandon the safety of gold and will start to be invested again in undervalued productive assets.

Look up "dow gold ratio" on google for more.

absolutely right cgnao.

...when everything else gets shot to bits then the best defence is wealth preservation....but it usuallly does more than preserve,it creates wealth for the holder,until such time as it is replaced by a better vehicle or is attacked by government.

...left to their own devices,markets work......what we have had of late is a lot of tampering and ramping by media...leaving governments fairly powerless and when counteractive measures do come,they are ever more draconian to compensate......leaving bubbles more and more violent.

...of course this is good for some who spot the trend early...but for mr and mrs avg????

[cgnao]

But when the FTSE and dow where higher in 01 what was the price of gold? Wasn't it lower than it is now? Also how can you say it holds value when it spent over 5 years at such a low price?

Remember value and price are two different things. Buying value at low price is the key to successful investing.

Gold has intrinsic value because, among other things, it is very scarce. Paper money can be created at will and its intrinsic value is zero. It is just a huge confidence scam perpetrated by governments and central banks. The picture below (courtesy goldmoney) should convince you of this. Another example is that one sovereign used to be one pound. Now it takes over 70 paper pounds to buy one. And don't forget the house price bubble, which is just another manifestation of inflation.

Central banks manipulation has made the price of gold so low compared to other assets that it is a once in a lifetime opportunity, even after the recent run up. It will go much higher.

http://www.goldmoney.com/en/commentary/2006-02-05.html

Gold may spike upward in the near-term because of the short squeeze that appears to be gaining momentum, but if this spike occurs, don't lose sight of the big picture. Namely, gold's purchasing power is consistent over the long-term, while the only consistency offered by the dollar is the ongoing debasement from inflation that erodes its purchasing power.

[debtfree]

if the dollar is the worlds 'reserve currency'

then what has been the main currency for the last 3000 years ?

[fishface]

Sorry to be slow but what is the graph meant to be showing? Is it that a unit of gold can still buy a unit of oil but you need 6 X as much dollars to buy a unit of oil? That doesn't make sense...

[Te Mata]

Remember value and price are two different things. Buying value at low price is the key to successful investing.

Gold has intrinsic value because, among other things, it is very scarce. Paper money can be created at will and its intrinsic value is zero. It is just a huge confidence scam perpetrated by governments and central banks. The picture below (courtesy goldmoney) should convince you of this. Another example is that one sovereign used to be one pound. Now it takes over 70 paper pounds to buy one. And don't forget the house price bubble, which is just another manifestation of inflation.

Central banks manipulation has made the price of gold so low compared to other assets that it is a once in a lifetime opportunity, even after the recent run up. It will go much higher.

Thats a bloody interesting graph cgnao, convincing even.

[cgnao]

Sorry to be slow but what is the graph meant to be showing? Is it that a unit of gold can still buy a unit of oil but you need 6 X as much dollars to buy a unit of oil? That doesn't make sense...

Yes it does not make sense. It takes now 60 X (yes that is sixty times, not just six) as many dollars to buy a unit of oil. Understand now why you have to protect your savings by buying gold?

Anyway you are living proof of how central banks and governments have managed to brainwash the populace and make them believe that inflation is low and they can trust their funny monopoly paper money.

[fishface]

I'm even more confused.( I tried to find the price of gold since 1945 but Kitco only shows the last 10 years)

If it takes 60 X as many dollars to buy a barrel of oil now than in 1945 but still takes the same amount of gold to buy a barrel of oil does that mean gold has gone up in PRICE by x60???????????

Please spell it out because I'm a simpleton and the axes of the graph are not clearly labelled!

[malco]

I'm even more confused.( I tried to find the price of gold since 1945 but Kitco only shows the last 10 years)

If it takes 60 X as many dollars to buy a barrel of oil now than in 1945 but still takes the same amount of gold to buy a barrel of oil does that mean gold has gone up in PRICE by x60???????????

Please spell it out because I'm a simpleton and the axes of the graph are not clearly labelled!

The dollar used to be pegged to gold at the rate of $34/oz for foreigners who wished to exchange dollars for gold. I think this was done by Rooseveldt during the Great Depression and at the same time he confiscated all domestic gold and dumped it in Fort Knox. During WW2 the US gathered most of the world's gold because everybody needed US arms and they had to pay in gold. So for most of the period through to the early 1970s, the dollar remained on the Gold Standard at $34/oz, although there was a steady drain on US gold holdings to sustain that rate, and it got a lot worse as the Vietnam War intensified after 1965. The dollar gold standard was terminated by Nixon in I think 1972 because too much gold was running out of Fort Knox to folk like de Gaulle who liked gold more than paper dollars. Since the early 1970s, there has been no formal link between gold and any currency. The dollar has since declined against gold to today's rate of $550/oz (after fluctuations!). 550/34 = about 16.

In the early 1970s, an ounce of gold bought about 20 barrels of oil. The long term average has been about 17 barrels/ounce. Today an ounce of gold only buys about 8 barrels of oil. This is an extremely low ratio, and is a strong prop in the argument that gold is still undervalued. I would regard the incipient oil crisis as the principal factor to believe that for the long term investor, gold makes an awful lot of sense and may well be the best buy available (except possibly silver).

[Guest Bart of Darkness]

cgnao (or anyone else who uses Goldmoney):

If you buy more than £5000 of gold (coins or bars) from a dealer, they are obliged to record this fact with HM Government (money laundering regs.). Does the same apply to gold in a Goldmoney account?

[gazwheat]

cgnao (or anyone else who uses Goldmoney):

If you buy more than £5000 of gold (coins or bars) from a dealer, they are obliged to record this fact with HM Government (money laundering regs.). Does the same apply to gold in a Goldmoney account?

As quoted from Goldmoney.com, courtesy of cgnao.

GoldMoney respects your right to financial privacy. The information requested above will be kept confidential and not shared with outside parties for any purpose, except when specifically required to do so by a lawfully executed order from a court in Jersey, British Channel Islands. This information will not be provided to outside parties for marketing or any other purpose. See our Privacy Policy for details.

[Guest Bart of Darkness]

Thanks gazwheat (and indirectly cgnao).