Guest Post: The Case Against Gold
Lazy Man is a lazy man from California on a quest to retire early. He believes a penny saved is a penny earned, and a penny available for investing. He writes regularly on his blog, Lazy Man and Money
My fiancee (Energi Gal) and I were watching Saturday Night Live a couple of weeks ago when their signature fake commercial came on. The commercial was an advertisement to get people to invest in gold. If you missed it, it was horribly “unfunny.” The character is obsessed with gold. She has a room where everything is gold and washes her face with gold, saying “gold” over and over again. Energi Gal rarely talks much about money, so when she does, it gets my attention. She simply said, “What good is gold any more? Who wants gold?”
She was, of course, talking about gold jewelry. Maybe I have a unique social group, but no one I know has yellow gold jewelry anymore. When I asked Energi Gal to be my wife, she said that she would have preferred a $100 titanium ring to a $1,500 gold one. It seems like gold is just going out of style.
This has got me thinking. Outside of its commodity value, what is the true value of gold? What practical use does gold have? It’s a great metal conductor, but any number of metals can be used in its place. Contrast that with orange juice, a barrel of oil, and soy beans. These things will always have value to people as they are consumable.
Gold is only valuable because it’s agreed upon as a currency. Historically gold has had great value for hundreds of years. If you go back before cars and plasma TVs, jewelry was one of the most sought after commodities. Most school children are taught that Manhattan was bought for $24 of beads. Whether this is true is a matter of some debate, but it shows the historic value of jewelry.
We currently live in a time where much of the world doesn’t have the latest technology. As the world moves forward, will more people decide that they’d rather have a fancy car or a plasma television than gold? If you invest in gold, you better hope not.
Read more about personal finance and investing from the from Lazy Man’s perspective at Lazy Man and Money.
Article comments
Well, here we are in mid-2008 and gold is about $970. Everyone misses the point about money. It has nothing to do with its intrinsic usefulness, or we’d all be trading loaves of bread. Paper money has no instrinsic usefulness either. It’s what people agree to use as money.
The elements of good money are its scarcity (not Zimbabwe dollars), recognizability (gold coins are instantly recognizable as authentic), divisability, durability (unlike our aforementioned loaves of bread). Gold is extremely hard to increase in amount. If corn cobs were money, everyone would plant corn. People try to mine gold, but it’s expensive and prone to failure. Dollar bills are easy to print. That’s why I make more money than Babe Ruth did in his heyday. It means nothing, they just printed the hell out of it. He was paid the equivalent of 4,000 gold coins per year in 1930 gold coin amount. Today, that would be over $3.8M. I don’t make $3.8M, I guarantee you that!
From an engineering standpoint, gold has very favorable material properties. It is used often in space application because of its low emissivity value. When your satellite is up in space and exposed to extreme environmental conditions, we use gold foils for thermal protection of sensitive electronics.
So if the price of gold goes down, that is good news for us engineers.
Golbguru, you have some very good articles on gold. I’m not sure about the color, because like Flexo’s social circle, yellow gold is way, way out of fashion in my social circle. I’d sooner expect to see someone with some dung on their shoulder.
As for the value of it in jewlery, if people follow suit that my circle (and Flexo’s) has (not saying they will, but there is potential), it’s reasonable for it to fall towards the price of copper. Maybe only a few hundred dollars a pound at a time, but that would surely not want to be in an investment I want to be in. We saw how fast that beany babies dropped. Fads can go out of fashion quickly. Also, it’s pretty close to impossible for the average person to tell the difference between gold and fake gold.
John, I went for platinum for my fiancee’s ring and she loved it. Yellow gold would have been a huge mistake (i.e. get a new ring, now!) I thought about white gold, but it’s too malleable. In hindsight, I probably would have gone for titanium as I have for my wedding band. Lighter-weight, stronger, cheaper, looks the same as white-gold, platinum, silver, etc. – what’s not to like?
Gold is great as a hedge against inflation, but I wonder what would happen if this disappears. Wasn’t the dollar once attached to silver (i.e. a Silver Certificate?). Now, I don’t see anything like that. Historically speaking it wasn’t that long ago.
Gold is really good if things start to break down. Just about every government on earth is inflating their currency. Gold really doesn’t have this problem.
It’s easy to poke fun at gold bugs and cast them all as some modern-day Silas Marner or Scrooge McDuck. It’s prudent to own a little.
Wow, it must’ve felt great to propose to your girlfriend and have her tell you that the ring you picked out wasn’t what she wanted.
Kiyosaki liked gold for a while when the prices were high, because then he could claim he was “right all along,” pointing back to earlier writings where he claimed gold is where to invest. The thing about cycles is that you”ll be right part of the time.
Not a lot of people in my social circle like yellow gold jewelery; although white gold is more popular.
I don’t really get the obsession with gold either. Robert Kiyosaki (Rich Dad, Poor Dad) is big on the whole gold thing and while I agree and follow his advice I’m not sold on gold. I have owned gold as an ETF before but I just owned it as a hedge (contrarian) strategy for the rest of my portfolio; not because I thought I would really make money off it. Other than hedging I’m not sure why anyone would want gold in their investment portfolio.
I’ve always thought this myself. Gold is one of those commodities that’s not a commodity. It is after all, a precious metal. Its price therefore won’t reflect its true practical value. My concern is will one day gold no longer be seen as a necessary inflation hedge and in times of high inflation and war will people look elsewhere?
As for demand of gold for jewellery, India are currently huge users of Gold for jewellery, and as their economy grows are likely to demand more. Reserve Banks do well at keeping huge supplies of Gold, and therefore limiting supply and keeping prices high.
As for your partner and friends being ‘over gold’, I think it might be your social circles buddy, every woman I know has an unhealthy obsession with Gold and Diamonds!
Lazy, you are thinking on the right track as far as value of gold is concerned.
Here is an excerpt I quoted in one of my posts earlier. It’s from an article by someone called Paul Van Eeden (you can google him) and resonates with your thoughts.
“If gold is a commodity like rice or aluminum, then it should be priced as such. It would seem that under such circumstances, gold is the most overpriced commodity in the world. The value of gold as a commodity stems from its physical properties: electrical and thermal conductivity, resistance to corrosion, malleability and ductility. The biggest market for gold will be in the electronic industry where it will compete with other metals, notably copper. If gold were to truly compete with copper in mass production of electrical components then the price of gold would have to be competitive with the price of copper. Copper trades for around $0.80 a pound and gold for more than $4,000 a pound. This means that the gold price would have to drop to less than $0.06 (six cents) an ounce to be in the same region as the copper price. Obviously gold is not being priced as a commodity. There is a demand for gold that inspires people to pay substantially more for it than its commodity value. Gold is money.”
I don’t know what draws people towards gold…but at times I think…may be it’s the color among other things (for example, given a choice between 18k yellow gold and 18k white gold…people would invariably fall for the yellow gold). That’s sounds silly and probably it is.
Also, cars and plasma TVs are prone to depreciation…while jewelry is not (well at least the gold in the jewelry is not). Jewelry may go out of fashion but, when melted, you will get back the worth of the gold contained in the jewelry even after centuries.
Also, the prices are based on global supply and demand…so even if gold becomes out of *fashion* in US it won’t necessarily go out of fashion in the rest of the world. Prices may fluctuate due to this…but it will still retain considerable value. May be sometime in the future it will loose it’s value (in favor of other precious metals…not in favor of plasma TVs or cars)…but that’s not going to happen in our generation. 🙂
Sorry about this incredibly long and boring comment.