Wednesday, September 7, 2011

Gold!

I wont say that I think we’re in a gold bubble because an ounce of gold has lots of room to rise until it trades at historical prices for tulip bulbs or 100 shares of Nortel.

Fundamental analysis points to a high value for gold as well. In addition to its ability to sit around in piles near armed guards, an ounce of gold has many uses:

– paperweight
– ring
– shiny thing
– very small barbell

We have reason to believe that historical fascination in gold will persist. After all, modern inventions like computers and smart phones are in no way more interesting to look at than a shiny piece of gold.

13 comments:

  1. 100 shares of Nortel... he, he, he... I guess that fits well with the Tulip Bubble

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  2. @Dale: You should have detected some sarcasm and possibly some humour. I'm not sure what you mean by jealousy here. Are you a gold bug now?

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  3. No, I am not a gold bug. But I do admit to some jealousy of those who ahve been of late. One can be both disciplined and jealous.

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  4. I'm glad you didn't include "eat it" as one of gold's uses. Midas found that out the hard way.

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  5. @Dale: I must not be jealous if I couldn't even figure out what you meant. I've received a very small bump in index returns due to gold's run and it will always be the case that some subset of my portfolio will do very well. I don't waste time worrying about what could have been if my portfolio were more concentrated in one area or another. What drives me to write about this subject is the alarming number of my friends who know nothing about investing but are talking about buying some gold.

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  6. I am surprised that you have friends that know nothing about investing. They should be reading your stuff and thereby becoming more and more knowledgeable.

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  7. what about gold teeth, that's a use ?

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  8. @Paul: And gold lighters. There are so many uses. Those who own gold shouldn't be worried that all uses combined justify less than one-tenth of gold's current price.

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  9. I think the current fascination with gold is due more to folks seeing it as a currency than a shiny piece of bling. As confidence in fiat currencies wanes, many see gold as the only alternative. How long that feeling lasts is anyone's guess. For the record, I'm not a gold bug and I'm not invested in the yellow metal - for many of the reasons you hinted at in this article. But I'm still happy for those who have profited from the rise in gold over the past decade. Thanks for the chuckle!

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  10. There was an interesting podcast that might be of interest to readers (and the writer) of this blog, Michael.

    It's more or less trying to answer the question of "Why gold?". That is, why does gold traditionally serve as a store of value. It's somewhat pertinent to this particular post, and a good historical account. It's hosted by the excellent Planet Money podcast:

    http://www.npr.org/blogs/money/2011/02/07/131363098/the-tuesday-podcast-why-gold

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  11. @Gene: Thanks for the pointer. The NPR piece is very interesting. The conclusion is that if we were going to pick an element to be the basis of money, then gold is the best choice.

    However, this would not give me much comfort as an owner of gold. What if we decide not to choose any element as the basis of money? This is what the world's major governments have done. Investors who don't trust governments cling to gold, but I think it's a game of hot potato. We will keep selling gold to bigger fools until finally the spell we're under that causes us to overvalue gold gets broken and the last people left holding gold will be disappointed to find its value drop to whatever value it has for practical purposes such as in electronics and jewelry.

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  12. Agreed, the podcast explains why gold was initially used to mint coins, but really, that purpose is mostly obsolete (our coins no long have precious metals in them and are no longer backed by gold), except in countries with really poor currencies or corrupt governments. In those cases, perhaps holding jewelry and gold is safer than holding local currency.

    I heard a story about bitcoin on that same podcast. Apparently its creators chose to model their currency after gold, making the first bitcoins relatively easy to "find" using powerful computers to do complex calculations (analogous to mining gold). As more bitcoins were found, they became increasingly difficult to find, such that now it requires a lot of time and electricity to find new bitcoins. Bitcoins have also suffered from dramatic bubbles.

    Here's that podcast episode, in case you're interested:
    http://www.npr.org/blogs/money/2011/07/13/137795648/the-tuesday-podcast-bitcoin

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