I was listening to Peter Schiff in 2006 predicting the collapse of the US housing market with outstanding accuracy. Similarly, he described the bursting of the dot-com bubble. In both cases assets were bid up by speculators with no regard for their underlying value as determined by rents or dividends.
I respect Schiff immensely, but I can’t help but wonder why he has such faith in gold. After all, gold produces no returns at all. Of course it has some intrinsic value, but its value for industrial use and use in jewelry is well bellow the high prices it now sells for.
Is there a reason why gold should be distinguished from these other assets? Presently, I can’t see how its any different from tulips.
If the bailouts had not occurred the price of gold would have fallen as we would have entered a deflationary depression like it was in the Great Depression. However, the Fed has been printing like crazy so the value of dollars is falling on the margin. There is still the same amount of gold in the world though so its price, which is is determined by the market, has not changed all other things being equal.
Gold has classically been a store of value for people’s savings because its price is not determined by the government printing press. When the paper dollar no longer has value, gold will still have a value determined by the market. As more people realised they are being robbed by the politicians they will also want to own gold so the price will be bid up.
Hmmh, but if its value for jewelry is well bellow the prices it now sells for, how do the jewelers get by? I think if that was true you could no more buy golden rings as it would no more make sense for the jewelers to be making them. Jewelry traditionaly had the function of giving women financial reserves so its role is not at all different from the role raw gold serves today. Therefore I think raw gold will have the same value for jewelers at any price.
But I sometimes wonder the same about what you have to say in general. It seems to me precious metals only have value because we assign value to them albeit they have no or very limited practical uses. Yes they are rare, but so are certain types of rocks and we do not hoard them. I wonder why wouldnt in a truly mayor crisis the price of precious metals collapse as people discovered you can not eat it or make an axe out of it? Would you not idealy preserve wealth by buying something that derives its value from a practical use instead of convention? Like copper (if it werent for the storage costs), or real-estate, or land?
You misunderstand me. Its my fault, the sentence you quoted was poorly expressed.
What I meant was; if gold had not been bid up by speculators and was only being purchased by people who were actually using it for some practical purpose, it would be worth much less than it is today.
As you go on to point out, in a full blown economic collapse, people would realize they cannot eat gold and its value would fall relative to other goods.
You have successfully explained why gold is currently being bought by investors fleeing paper money. It makes perfect sense. I do not dispute that because the supply of gold is finite and its value cannot be destroyed by the foolishness of the government, it is superior to fiat money.
However, I’m still hoping someone can explain how gold is different to the other assets I mentioned which were bid up by speculation until the bubble burst. You provide a good explanation as to why gold is likely to rise in the short term. But my point was that eventually the price of gold will have to fall significantly. Even your own reasoning implicitly acknowledges that gold’s value is driven up by speculation because people expect it to be worth more than dollars in the future. Sure the supply of gold is finite, but so is the supply of land. This alone did not prevent the price of land collapsing.
Surely at some point investors will realize that the price of gold cannot continue to rise in perpetuity. Since it is producing no returns, only the prospect of a capital gain, they will try to divest themselves of their holdings in gold while prices are high, leading to a crash in the price. I can’t see any way around this, however, I am willing to concede that this may take a long time to happen.
I think gold prices can go on rising because you are seeing the price in terms of dollars, so as they print more money, gold will be worth more dollars, but only because the value of the dollar is going down, not the price of gold that is going up. If you have dollars in this scenario you will lose all, if you have gold you won’t.
No. Gold is a hedge against inflation. It’s a store of value. Particularly when contrasted with dollars.
That is a practical purpose, which Gold has been (by law) removed from. When things get sketchy, law goes out the window. Even if people cannot pay their taxes in gold, they will still try to store money there as opposed to maintaining their savings in fiat.
Also, “speculators” is silly. Speculators are driving the market down. The physical market is regularly over $1000/ounce. The paper market is well below that. Which is why one guy is going to try and take delivery of his futures, to see if the market can deliver at those lower prices. He has nothing to lose, and everything to gain.
But you can use gold reliably to buy food. In an inflationary crisis, people will take gold over paper.
No one who faces a choice between all gold and no food vs. all food and no gold chooses the former. But that is not the choice which is presented to people, and if it ever was, gold would become worthless and freely abandoned. But that is simply an absurd counterfactual. Your argument is essentially the same one as the one which led to classical economists into trouble with the “paradox of value” - i.e., why do things with high use value (e.g., water) have such a low price relative to things with low, or no, use value (e.g., diamonds)? The reason is because people make decisions on the margin, not in some holistic, metaphysical choice between diamonds and water or gold and bread.
Well, what we really see when people buy gold as a store of value is they translate their wealth into a new currency. Taken to its ultimate conclusion in a free market, the price of gold would rise in terms of dollars until gold replaces dollars as the most common medium of exchange.
For example, lets say that there are 10,000 tonnes of gold in the world. If the production of money was in the free market, the theoretical value of one dollar in terms of gold would be found by finding the dollar as a fraction of the total number of dollars in the economy and then finding the corresponding weight of gold that holds the same fraction in terms of the total amount of gold in the economy, all other things being equal of course. Theoretically it would be a one-to-one translation, however all the gold is already somebody’s property so the way the market creates a gold standard is not by dispensing gold at the post-office when you want to cash in to get your new currency but you have to buy it off people at the market value first, and they have to want dollars to sell.
Of course, the people who buy gold first benefit from pre-inflationary prices and those who buy last lose everything. The people who are buying gold now are essentially entrepreneurs taking risks with the hope that they will protect their wealth from the immediate threat of currency destruction in the anticipation that gold will be the currency of the future, which the market is trying to do and the effect of which is a high price for gold.
To answer your question, the price of gold can rise as much as people’s confidence in the dollar falls.
Agreed. However, this does not answer the initial question which I think is the most challenging:
Some very good responses have described why people are likely to buy gold in the short to medium term as the dollar depreciates. However, in the long run what is to stop the value of gold collapsing? Property was often used as a hedge against inflation and that speculative bubble also burst. So can anyone explain why the value of land is susceptible to collapsing while gold is likely to remain a good store of wealth in the long term. Alternatively, does anyone concede that gold is overvalued and in the long term its price will eventually fall significantly?
Edit: When I refer to the price of gold I do not mean the price in terms of US dollars, which could certainly rise until the dollar becomes worthless. I mean gold’s value in terms of other goods. I don’t see how its possible for 1 unit of gold to buy increasingly more of everything else ad infinitum. Surely the price must fall eventually and people heavily invested in gold will loose wealth. Although is most likely still a better store of wealth than dollars, I would contend that a portfolio that has too much faith in precious metals will under-perform a portfolio that consists more of land and shares, particularly shares denominated in foreign currencies that are likely to appreciate against the Greenback.
Ok, let’s view gold as a medium of exchange. In the long run its still “overvalued”. It derives most of its value from the belief that someone else will accept it as payment. History and tradition have ensured it has retained its value for a long time. But what is to stop people from people eventually refusing to accept this relatively useless rock as payment?
You keep asserting this, but I don’t see you substantiating those assertions. Why?
Nothing. However, it’s “uselessness” is only your subjective valuation. History and tradition (as you have pointed out) have validated gold’s worth millions of times over.
Seems to me like you have an anti-gold agenda. Which is cool, but it means this conversation is going nowhere, because I don’t think you will be satisfied until you hear something that corroborates your current opinion.
For example, you keep insisting that gold is overvalued, and yet you won’t address that the physical stock is in high demand, so high that finding inventory is not easy to do right now. Logic would say that something overvalued would not be trading 20% below the street. That seems to indicate that it is undervalued.
You should read about the concept of marginal utility (Carl Menger’s Principles of Economics)
Gold is not overvalued since the only way to determine the value of something is through the market. To say that it is overvalued you would have to come up with another way to determine value
As I already stated, I mean it is overvalued in the sense that its value is derived from the belief that it will be able to buy its owner something useful in the future, not in any inherent usefulness it possess.
It’s usefulness is not subjective. It has few industrial uses and substitutes available for most of these.
I don’t have an anti-gold agenda. I believe precious metals are part of a prudent portfolio and I don’t believe that gold will loose significant value in the near future. However, I think its interesting to consider the possibility that at some point, the value of gold could collapse.
You mention history and tradition as validating gold’s worth. I disagree. Nothing inherently valuable has been validated about gold, it merely shows the strength of the belief that gold is valuable. Will you concede that at some point people could loose faith in its value and the price could collapse?
I understand this concept perfectly. It is not relevant to my argument.
The market does overvalue things at times due to government intervention. Because of artificially low interest rates and under pricing of risk due to implied government guarantees, shares and property were overvalued for most of the 2001 - 2007 ‘boom.’ They were overvalued because the prices being paid for them did not reflect the returns they were capable of producing.
The same applies to gold. It will be bid up because the government is destroying the value of dollars and people seek a way to preserve their wealth. But in the long run this gold can produce no returns for its owner. It is valuable only as a medium of exchange, and any medium of exchange is susceptible to loosing its perceived value, including gold.
Right, but I don’t think you have a basis for that, beyond your own subjective feelings. Or am I missing something?
You miss the point. Value is subjective. It’s uses do not determine it’s value. It may contribute or detract from it, but things are not objectively valued based on strict utilitarianism.
Most of us are not investors. What looks good in a portfolio is for someone else to figure out. We’re more into concepts like free market money, sound money, full reserve banking, commodity money.
And the strength of that “belief” has continued to subjectively value it high, whether it is as money, as a collectible, store of value, jewelry, etc.
Sure. I might also die in my sleep tonight. But I wouldn’t bet on it.
We’re not economic forecasters, alchemists or soothsayers. We’re students of rational economics, liberty and the study of human action. Gold is money because people have chosen it to be money millions of times. Maybe there were better choices, but the market is usually pretty good on sorting out the wheat from the chaff. And the market has consistently given gold a thumbs up.
Are you saying that the concept of marginal utility is not relevant to determine value?
And those booms you mention were cause by an expansion of money, since governments don’t determine the amount of gold,that is not likely to happened with the gold market.
And yes ,if people stops perceiving gold as a proper medium of exchange it would lose its value, but why exactly would that happened?
Value is indeed determined by utilitarianism, although as you rightly point out, what gives an individual utility is of course subjective. Gold can be valuable because people think it looks nice and this itself gives them utility. Because of this gold will always have some value even if the current price does collapse. Fiat money will not, because pieces of paper or entries in a database provide no utility at all.
But gold is not currently valuable because most investors actually like anything about gold. It is valuable because investors believe that it will preserve or even increase their wealth and will thus allow them to acquire things that actually do increase their utility in the future.
Tbh, what got me questioning the value of gold was this comment by Warren Buffet:
“(Gold) gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.”