whether gold is a value investment, one needs to first recognise that gold does not have a balance sheet, management team, price-earnings
ratio or any of the other
things one needs to
analyse before making an investment. Also, gold does not generate any cash flow, so it does
not pay a dividend. We can therefore
conclude from these observations that gold is not an investment. Indeed, it is
something different, which means that
normal investment analytical
techniques cannot be used to determine gold’s value.
Value of course arises from an item’s usefulness, and
gold is useful because it is
money. Though only used as currency these days in a few places like Turkey and Vietnam, gold is still useful
in economic calculation,
or in other words, measuring the price of goods and services.
For example, when
the Maastricht Treaty was
signed in February 1992,
one barrel of crude oil cost $19.00, €15.95 (Dm 31.30) or 1.67 goldgrams. Now it costs $91.79, €71.27
or 1.61 goldgrams, which makes clear that
not only is gold useful in communicating prices, it preserves
purchasing power. Gold has been useful
in these ways for over
5,000 years, so it is logical
to assume that gold will remain useful for the foreseeable future.
Some say that the gold price
rises and falls, but they are grabbing the wrong end of the stick. It is
the purchasing power of national currencies that rise and fall. Here is an analogy
to make this point clear. When standing in a boat
and looking at the shore,
it is the boat (currencies) – and not the land (gold) – that is bobbing
up and down.
Currency fluctuations occur
in the short-term, but over the long-term, a currency’s purchasing power is continually eroded from inflation and other debasements inflicted on it, as is clear
from the example above showing changes in the price of crude oil. There is, however, a subtle but more
important point to make here.
Gold does not create
wealth. It cannot possibly do that because it does
not generate cash flow. Remember, gold is not an investment; it is money, and these two things are entirely different. So when the price of gold rises, wealth is simply being
transferred from people who hold currency
to people who hold gold.
This wealth being transferred already exists. It is wealth held in the form of purchasing power.
Lastly, is gold
good value? This is a question that
each of us must answer by
ourselves because value is subjective. But to me the answer
is clear. Gold is indeed good value because it is
a useful money, not prone
to the problems perennially
plaguing national currencies.
Further, gold is
good value because it is not over-priced, a
conclusion that can be reached by simply considering supply and demand. Even though the gold price has been rising this past decade,
the supply of national currencies
is being created much faster than the supply of gold. Second, the demand
for gold understandably continues to rise as it offers
a safe-haven from the ongoing turmoil of the interrelated bank insolvency and sovereign debt crises that have been riling national currencies. These crises have not ended, so I expect this
supply/demand relationship will continue. Therefore, gold will become more highly valued in the months ahead, meaning that its purchasing
power will rise.
point in the future, which cannot
be predicted, gold will become overvalued.
Its purchasing power will exceed historical
norms. To give but one
possible example, maybe a
barrel of crude oil will only cost
0.50 goldgrams or less. When that moment arrives, it will be
time to reduce your gold
holdings to buy undervalued
investments or to purchase
some consumer goods with your savings,
which is the gold you are accumulating now while it
remains undervalued. I
suspect that we are still many months,
if not years, away from that event
because gold is far from being overvalued.