the gold rush of 2008

Is gold actually worth something? I know that it’s over $1000 per ounce and it’s a hot new speculative item. But in the true sense of “worth,” does gold actually have any worth?

Gold has been used since earliest human history as a form of currency. Gold’s recognition as a currency predates written records, so it is impossible to know when the first hunter-gatherer actually traded a hunk of shiny yellow rock for his buddy Mog’s antelope livers. It’s a mystery to me why this exchange occurred, except possibly that gold (being a soft metal) was easy to work into arrow points or something of that nature. Nonetheless, it was probably one of the earliest symbols of value: this rock represents ten bear hides or the effort required to get those ten bear hides. It allowed people to start setting equivalent prices that before they only figured out through barter: ten bear hides equals eight spear poles, and so on.

We still use gold today for non-currency purposes. It is used in dentistry and consumer electronics and makes a bizarre appearance as little flakes in Goldschlager (yes, that is actually gold). The US, for most of its history, used gold to set the value of a dollar (so a symbol of value, the dollar, actually represented another symbol of value, gold). That meant that theoretically if you got fed up with the inconvenience of paper money you could walk into a bank and demand 6.2 ounces of gold nuggets. Gold was used to set exchange rates for different currencies, too – a dollar equaled 1/124th of that 6.2 ounces, and a ruble equaled 1/278th (I am making numbers up, by the way). So the exchange rate meant something.

After World War II, countries decided to allow that system to fluctuate a bit. In 1971, the US broke the system by suspending the convertibility of dollars into gold. You no longer were able to say “this dollar represents 1/25th of an ounce of gold.” Instead, the dollar became a completely abstract symbol that has no real worth other than your belief that someone will give you something of value if you give them that dollar in return. Try taking your dollar to a bank and demanding the gold equivalent. The dollar (and all other world currencies) are now more or less based on faith.

So what is gold worth? Does it produce income? Does it become more valuable with time? It is a scarce resource – one day it will run out, like oil. What exactly does an ounce of gold represent? The main marketplace for the quick liquidation of gold is pawn shops. Gold does not appreciate in value, although its price does fluctuate.

So should you invest in gold? Personally I wouldn’t. I (somewhat) understand investing in real estate, because you can build a house and live there. I understand buying shares in Pfizer, because they make medicines people need, and they pay dividends to shareholders from the profits they make. Both of those investments create something of value. Gold is no better or worse a speculation than investing in something like a diamond wedding ring. Maybe that diamond will be worth more someday, maybe less. Same with gold.

I just look at the fact that people invest in Google or pets.com or an interest-only mortgage in an investment pre-construction condo in 2004 and I wonder if I am insane to think that waiting for the price of a thing to go up is just a bad investment. Nothing with a future price of $1000 – and a current price of $100 – is worth more than $100 today. It is not worth $1000. You HOPE it will be. You HOPE the Dow will settle at 36,000 someday, but today it is not. Yet if you buy a business that makes $10 a day, that’s currency that – at least for now – you can exchange for value. Gold may someday be $1000 an ounce, or $12 per ounce, but it’s still going to be a rock that, no matter how big, you couldn’t even use to buy a stick of gum with at your local supermarket.

Creative Commons License photo credit: *hoodrat*

15 comments

  • Assuming you could properly value gold, I think there’s been so much talk about it that it’s gotta be too expensive since many are jumping into it. If everyone knows it’s a good investment then it’s probably too late to invest.

  • I think this post should create a very lively discussion.

    I am sure many of us may not equate owning gold to the ability to buy gum at the local supermarket.

    Indians buy gold by the proverbial busload and not as a means of producing income. Does this inability to produce income mean that gold is worthless? I am not sure if this would be a fair definition.

    Anyway, I am really curious to see the other responses.

  • What gets me about gold is how people will say “Look how well gold is doing! It’s at a 20-year high!” Translation: its cumulative return over the last 20 years was 0%.

  • While people say it’s good for a down market, so are bonds…and those “make sense” like stocks do.

  • Yo Brip.

    I disagree with this partially. Yes, gold is an abstract symbol from whence our abstract symbol was once based on. However, gold and silver are both good investments. Alas when people hear the term investment they think profit-grower, not so with gold.
    With gold what you’re doing is stabilizing your income. It’s what you said. The American dollar and most other currencies today are based on faith alone and that is how the system works on their weird topsy turvy money religion. Alas, gold the faith is never shooked. They’re the best church to subscribe to when it comes to times of currency paranoia (Such a flailing dollar before its new master the euro. Or canadian dollar even)

    If you had bought gold your income would’ve stayed relatively the same and which you could’ve traded all that gold out for another currency such as the euro once it overpowered the dollar. Or if it did not overpower the dollar you still have tons of gold worth the same, which is exactly what the investment is for. Stabilizing the income, not growing it.

    It’s like life insurance, it’s a shelter for your earnings, or a fail safe incase that special substance hits the fan.

    My two cents!

    Great post! And is that my golden drink in your picture? Oh the Aztecs would laugh now if they only could see…

    -Greg

  • Hunter Nuttall, say if in 2000 gold was at 400, then in 2001 it was 500$ then in 2002 at 600. Well in 2002 it was at it’s highest point but each year the cost of it increased, bringing increasing returns each year.

  • SYL, what I’m saying is that if gold was at 400 in 2000, 500 in 2001, and 600 in 2002, it looks like it’s doing well. But if it was at 600 in 1982 when you bought it, you’ve only broken even as of 2002.

    The phrase “gold is at a 20-year high” sounds impressive, but all it means is that it hasn’t appreciated over the last 20 years (start to finish), which doesn’t make it look like a good investment. A hypothetical investment that always goes up will always be at an all-time high, never a 20-year high.

  • Well it depends on where you label your start and end lines. When you jump in and jump out.

  • You’re right SYL, you can make good money in gold, if you know when to jump in and out. Personally, I have no idea how to time the gold market.

  • Danny Tsang

    Gold can’t be rented out for a monthly income, gold can’t power our cars or the energy we need to sustain our economy, gold can’t be eaten. I don’t know what gold is good for besides looking pretty on a Rolex or a ring. Therefore I never understood how gold can be treated as an investment. The only way its a wealth preserver is if you believe that the US dollar and perhaps worldwide currencies and economies will continue to deteriorate. “gold is at a 20 year high” doesn’t say much because 20 years is a very long time.

  • I think Hunter and Danny are both making similar points and I agree completely – unless you really knew when to get in and out of gold (i.e. actively traded) there is just NO money to be made. It’s at a 20 year high now, great, but the chances it will grow at 8% per year like (theoretically) the stock market does are pretty slim over the long run, based on its history.

    Better to invest in a gold mining company than in gold itself (if you don’t mind ethical questions about how they mine gold).

  • I think gold could be considered a short on the morality/integrity of fiscal and monetary policy of the world’s governments. As such it definitely has value 😉

  • Ya, but adjust for inflation, gold is relatively low in price

  • Ya, but adjust for inflation, gold is relatively low in price