Gold: Not All That Glitters

August 14, 2013 § Leave a comment

Warren Buffet once said, “Gold is the only thing we dig out of a hole in the ground, put back in a hole in the ground, and hire someone to guard it”. True..Gold has little end use unlike other commodities like Copper, iron or Oil. It isn’t a bond or a stock with earnings. But there has always been a creepy fascination with gold yet not many people need gold. gold_2

Most Gold advocates state that they do not know what the price of Gold will be but they usually have a portion of their savings in gold because gold has always maintained value which isn’t actually true(1980’s to 2000’s). Most personal investors of gold just own gold in case there is a serious monetary collapse, which periodically has happened throughout history(Germany, Argentina, Greece, Cyprus) typically after very loose monetary policy such as excessive debt and money printing. The thinking has been that when everything all else collapses, Gold becomes the currency people use to trade.

¬†Gold curveThe price of Gold is driven by its scarcity and growing demand in emerging economies such as India and China but the supply of gold is low thus making it expensive. Everything that scarce is expensive. Gold has always had a relationship with stocks.The reason gold prices rises so high is partly because of falling stock prices. When stocks are falling, Investors take money out of stocks and put it into gold and vice-versa. The Gold standard was abolished in the 1970’s but governments and banks all over the world still hold tonnes of Gold.

When the economy of Cyprus collapsed  earlier in the year, Germany one of the bailout partners insisted it to sells its gold reserves to finance its because there is no better collateral than gold.

Will there a Gold Bubble? I don’t think so. The bubble is not in Gold but in Debt. In my opinion, Gold does not combat inflation but the status of rare metal increases its demand and makes it worth the investment but it’s worth noting that all this is an investing game and that there will be losers and winners


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