Thoughts on Gold

The value of gold can be quite a contentious issue, some people may view gold as the only true store of value, which unlike fiat currencies, has a limited supply and has fixed value. I take the other stand that gold is a speculative investment and NOT a safe haven for your money.

(Image source: https://pixabay.com/en/gold-bullion-bank-finance-savings-163553/)

So to start off with the difference between speculation and investments, you should read my post on Investing vs Speculation (done last Sunday) On its own, gold doesn't provide any income, returns, etc. Its value is only as good as what the next person will pay for it, similar to the Bigger Fool Theory. If no one is willing to pay such a high price for gold, the market for gold is likely to collapse and the price will fall tremendously.

Yes, I understand that gold has been a store of value since time immemorial and that it has many uses, such as in electronics, jewelry (I'll talk about this later), medical applications, etc. so it can be seen as an investment in a commodity, like copper, silver, oil or natural gas.

But, the use of gold is largely in jewelry, which can be seen as a Veblen good, which means that the more expensive the item, the more popular it is. These goods are primarily luxury goods, or basically things that people use to show off like expensive cars, watches and houses. This puts the demand for gold at risk. Looking at it, if for some reason or other, the price of gold were to drop, demand would decrease (unless people view it as a good time to stock up) and the vicious cycle of dropping demand and price ensues until the demand for gold is sustained only by the actual industrial uses of it, which is only a fraction of the current demand for gold so the price of gold would definitely have dropped a lot if that happened.

For a more balanced argument, we also have to look at other uses of gold that are currently not explored due to the high cost of gold. Currently, gold would only be used when no other common substitute can be found, but if the worst case scenario did occur and gold prices were to plunge to say that of silver, people may start using gold in more applications, increasing the demand for it and its price. This would help to reduce the loss of the value of gold in dollar terms. The limited supply of gold would also lend some weight to this argument

On the other hand, I think that gold would need to drop to a very level in comparison for the other uses of gold to start making economic sense, but until that level, all gold has is speculative value.

I think that gold has mostly speculative value and not investment value, as its value is hinged largely on people's perception of it and also the fact that it does not provide any income to supplement it should the price fall to irrecoverable levels. The view that gold is a safe haven asset is in my opinion the only thing holding up its price.

I'm not suggesting that paper currency (fiat) is the best store of money as well, but I guess that's a argument best left to another day. 

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