I was sitting here, and I suddenly wondered ‘What’s the price of a Krugerrand nowadays?’ (A quick google search found $508 at the only link I checked.) And that got me to wondering how gold ‘works’.
I remember in the late-1970s when gold soared to $800/troy ounce. (BTW: How many grams are tr. oz. and av. oz.?) Then the price fell. ISTR to the $300 range. At the same time, the economy started improving.
How is gold related to the stock market? To the bond market?
During the 70s inflation there were lots of people who predicted that paper money would soon become worthless and only gold money would hold it’s value. So lots of people bought gold. Of course, this pushed the price of gold higher and higher. So people starting looking at the rising gold prices and thought they could make money this way…buy gold at today’s prices, and tomorrow it will be worth more! Of course, you’d have to sell your gold to realize this profit, and you’d be only getting soon-to-be-worthless federal reserve notes in return.
So it created a classic speculative bubble. People buy because the price is going up, more buyers means more demand, which means higher prices, which means more people believe the price will increase, which means more buyers. Eventually people start trying to sell their gold, but the artificially inflated prices can’t be maintained and the price collapses back to commodity prices.
The thing is, gold is a mineral, it isn’t money. We add new gold to the gold supply every year. The price of gold depends on supply and demand. Hoarding gold in preparation for a coming economic collapse doesn’t make that much sense anyway…if civilization collapses who’s going to give you valuable food in return for a shiny rock? Gold has a certain value because it’s fairly rare and people like to make jewelry out of it.
Gold isn’t really related to the stock market, but rather to the commodities markets…pork bellies, etc. But the price of gold nowadays is pretty stable, so it’s hard to make much money predicting whether the price will go up or down next week. And gold isn’t seen anymore as an “investment”, since no one is predicting that the price will steadly increase. It could be looked on as a form of savings, or insurance against total economic collapse. But total economic collapse won’t neccesarily mean a return to gold coins anyway, very few people nowadays predict a situation where merchants refuse to accept paper money but would be happy to accept gold.
And even if those days come back, you have to look at the opportunity cost of converting your paper money into gold instead of investing it or using it to buy supplies or weapons. Hoarding gold today only makes sense if you predict collapse of paper money “soon” because you aren’t getting any return on those gold coins hidden in your basement.
Interesting article in today’s New York Times. Apparently there has been steadily increasing demand in China and India, while the stuff has been harder and harder to get out of the ground. Boy, does that have a familiar sound to it!
Anyway, here’s the article. May require registration.
In times of accelerating or unpredictable inflation, investors tend to prefer commodities. Commodities are real assets which cannot be depreciated by governments. Since precious metals are more durable than bushels of corn or frozen pork bellies, they tend to be used most often as such an “inflation hedge”. Because of its history and its broad and deep market, gold in turn tends to be the first choice among precious metals.
Ergo, when investors fear that central banks will be either lax or incompetent in allowing an acceleration of inflation, they tend to bid up the price of gold. Since these same fears tend to be bad for stock and bond markets, there will often be a small inverse correlation between the two sets of prices. Over long periods of time, however, investments in financial assets such as stocks or bonds will invariably outperform gold or any other commodity.
Gold is malleable, conductive and relatively chemical neutral. People started using it for jewellry because of it’s physical properties, but it’s used for many more practical applications as well. The Royal Bank Tower in downtown Toronto, for instance, uses gold leaf on the windows as an energy-saving tint.
It’s worth noting, too, that investors tend to use gold (and gold-related investments, like gold coins and other precious metals) as a secure place to put their money when they begin getting nervous about potential loss of value.
So when there is a bear market or a tendency to inflation, investors tend to buy gold, which makes its price rise. It’s probably the counter-market-trend investment, for that reason.
Asked and answered, with the bonus of a deeper take on why the chicken crossed the road. An ounce of gold weighs more than an ounce of feathers, but a troy pound (12 ozt) of gold weighs less than an avoirdupois pound (16 oz) of feathers.
I read that article the other day and was shocked to learn that, on average, it takes 30 tons of mined ore to produce one ounce of gold, with the preferred method being piling the ore up and trickling a constant stream of cyanide solution over it for months (or years) on end. My jewelry-buying days are done.
Sure gold is a barbarous relic, but history proves your statement wrong. In times of economic collapse, no one wants paper, or even modern coins, but gold is something that retains its value. Besides being rare and pretty, it also is chemically inert, so it lasts a long time.
You could also use iron as a store of value, but since it’s not rare, it would take lots to be worth anything, and it’s not a good way of storing value because it rusts.