Is Gold Great, Garbage, or Somewhere in the Middle?

With gold breaking below $1500 this past week for the first time since ’11, it has been more widely discussed than ever.

I do not want to discuss it in depth because people have better things to consider on a Sunday, so my apologies in advance if any nuance is lost, but here are some brief thoughts.

In addition to it often being discussed by one of my favorite folks to follow on twitter, @zerohedge, 2 of my other faves, @ritholtz and @reformedbroker also discussed it, and I have tried to include as many related links as possible for those looking for further reading on the subject.

In particular, @reformedbroker‘s article yesterday provided a ton of great reading.  Moreover, @skrisiloff discussed it exquisitely recently as well (especially per the volatility issue below in the chart from his article, he also addresses the unit of account aspect of money that I have generally disregarded up to this point in discussing the definition of money).

Gold Daily Declines

Ok…onto my thoughts…it is tough to discuss gold without discussing the theory of money, issues regarding the dollar, etc. but, like I said above, I do not want to make this post a dissertation so I’m just going to address the medium of exchange and store of value issues regarding gold.

Gold in theory is practically worthless in the traditional sense.  Although it does have some industrial uses, it would not be sufficient to justify anywhere near current prices.

So why would anyone value gold?

That is a GREAT question.  At the turn of the century I was in the middle of 5 years of study while earning my undergrad and first grad degree focused on issues revolving around business and economics, and I do not remember ever discussing gold.

This omission was likely due to its lack of cash flow or other traditional metrics that allow for it to be intrinsically valued.  However, as I was taught immediately after that 5 year experience, gold has long been the default medium of exchange when a paper currency goes bust because of excess dilution of a particular currency by its central bank.

So, while that does bode well as far as the thousands of years of historical precedent, I am fully aware that it has arguably very little inherent value other than that which humans place on it.

There is no way to ever really put a price target on gold.  While @BrianKellyBK on Friday on CNBC correctly pointed to the traditional viewpoint that an ounce of gold is usually worth approximately the cost of a nice London suit, again that is just a belief based upon historical precedent, rather than academic valuation of cash flow prospects.

So then why have I been bullish on gold for the past decade? Primarily because I have felt monetary policy has been too loose.

Why do I still think gold is potentially not a bad asset to have in one’s portfolio in limited amounts? First, I think the Fed balance sheet will grow to a greater-than-expected amount.  Second, sometimes it proves uncorrelated with other traditional assets and, hence, could be a decent diversification tool.

That all said, I have no emotional attachment to gold (or any asset for that matter).  There was a legitimate reason why no one ever taught me about it during my original teachings.

Paul Volcker’s heroic inflation breaking in the ’80s crushed gold.  If I were in a position to do so, as evidenced by the policies I’ve discussed in previous posts, gold would be crushed once again.

For now, the historical respect given to it as a medium of exchange means that it will likely continue to demand a decent price, and may well go up from here, even if quite volatile along the way.

However, I believe a solid medium of exchange needs to also inherently be a store of value, and that is where things begin to become difficult with the argument for gold.

@caseyresearch and @agorafinancial have done a nice job in the past of discussing the chemical properties as to why gold is the optimal element to utilize as the medium of exchange (e.g. durability and divisibility). Whether that is sufficient to serve as the “once and future king” of money is up to you to decide.

But, as I was reminded yesterday from the quote below from this article, sometimes that store of value analysis might require a relative, rather than absolute, assessment.

“Simply put, in the global currency wars, owning gold is like abandoning the battlefield altogether.”

Regardless, as is often the case, don’t bet the house on one idea.  And let’s focus less on whether gold is great and more so on how to have sustainable, high-quality economic growth so that it’s a moot point.

The future is as bright as we want to make it.  I am confident we have the human capital to ensure it’ll be so bright we’ll have to wear shades…

Related Reading:

@zerohedge: Guest Post: 11 Economic Crashes That Are Happening Right Now

@ritholtz: Gold Is A Commodity, Not A Currency

@ritholtz: What are Gold’s Fundamentals?

@reformedbroker: God is Making Gold Crash to Test Your Faith

@skrisiloff: Gold Daily Declines of 2.5% or More

@aswathdamodaran: The Golden Rule? Thoughts on gold as an investment

One thought on “Is Gold Great, Garbage, or Somewhere in the Middle?

  1. Pingback: Revisiting Gold: Food For Thought | Prober's Playbook

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