One thing always puzzles me about gold, old hedge against inflation and supposedly a storehouse of value since times of yore. Why? Are we still in an era where frightened or panicked people believe that gold is the last, best currency? If the world was riven again by wars and chaos, would having a few bars of the yellow stuff or a jewelry box full of gold chains make you some kind of king? If anything, the persistence of gold as some kind of “fundamental” currency seems to me driven by the same things that drive religious belief and, cough, technical analysis — and all the problematic areas that derive from human psychology. So the question is, do you play with that in mind? Or do you scoff at it and stay far away? I have a friend who owns some silver bricks and a nugget of gold who also believes numerous theories about September 11th and government surveillance, but ones that would make a skeptic scratch his head. Is he the kind of guy driving the gold rush?
At a practical level, gold isn’t even that useful a metal — copper by far exceeds it in terms of practical value and yet copper remains relatively unloved. Gold is a rare noble metal, to be sure, but so is platinum. (I found it interesting that gold can actually be synthesized, much like the alchemists hoped, from quicksilver (mercury) or platinum, although the spare nuclear reactor or particle accelerator required make the prospect of free and easy gold unlikely.) So why the importance placed on it? It must be historical. After all, it was about 100 years ago that people were heading for the hills, coming from all parts of the world for the pickings in California, Colorado, B.C. the Yukon and Alaska; we’re not so far removed from that mania. In fearful times, people go to their talismans, whether that be prayer or gold or magical thinking of many sorts — it’s a natural instinct, a sign that we are still animals at some deep level. Will we, in some future time, turn away from the metal, much as religion has decreased in stature in the past century? Or does the investor take this into account and try to surf the waves of human emotion that drive the gold market? I certainly keep my distance. But isn’t every market based on the weird mix of human emotion and perceived value of things? Certainly it’s difficult to apply classical value investing concepts to commodities (is there such a thing? How do you determine a commodity’s profitability?) but I suppose gold mining companies work much like software companies at a base level — after all, how do we determine the value of software, an even less tangible thing?
January 18, 2008 at 2:32 pm
Other than the jewelry applications of gold and platinum, there are industrial uses for both metals as well (e.g. catalytic converters, plating, etc.) which would bring demand to the metal.
Now the question is - if gold wasn’t the historical currency of the world what would the price of it be? There’s still a ton of it locked down in places all over the world (e.g. Fort Knox, the Federal Reserve in Manhattan, etc.)
January 18, 2008 at 2:43 pm
Yep, I’m aware of the industrial applications of gold, but as far as I know it’s not really comparable to the industrial demand for copper or even the other noble metals.
Good question about the value of gold minus its historical and cultural context. It’s still interesting to me to wonder why IT became the major currency in so many culture. I think possibly its natural rarity, along with its relatively unusual appearance/properties as a metal and easy workability to create jewelry and accoutrements, probably fed back to make it more important in various cultures than it would have if it was easily found or made. So gold probably found itself at the crux of various conditions that increased the demand for it.