Is Gold Really A Superior Investment?
I’m sure you’ve heard about the steady rise in gold prices over the last several months. You may have also seen the advertisements from gold investment companies pushing the purchase of gold, or heard predictions about even higher gold prices as world currencies struggle.
And just yesterday, the world’s first “Gold ATM” machine was unveiled in Abu Dhabi (Gold ATM Machine, Financial Times).
We have to take a step back and ask ourselves about the true underlying value of gold.
Why is it valuable? Because people demand it, and there is a relatively limited world supply. Why do people demand gold?
It’s not like gold will sustain you: you can’t eat or drink it, nor does it have utility in and of itself.
No, the reason gold has value is because it can be exchanged for money which, in turn, can be exchanged for goods or services. So the value of gold is derived from the very same place as is the value of money: access to underlying goods and services.
The actual value of gold, however, is entirely dependent on other people’s demand for gold, given limited supply, much like fine art. Unlike money, you cannot actually use gold for transactions: have you tried to use a bar of gold at your local restaurant or car dealer, for example?
Think about it: if for some reason gold fell out of favor — let’s say someone discovered it was toxic — then gold would no longer be desired as an indirect means of exchange — having to first be exchanged for currency — and its price would drop to nothing, quite independently of the value of money itself.
The value of money it also dependent on its demand, which in turn depends on the acceptability of the currency on the world stage as a unit of exchange.
Dollars are accepted as currency and retain their value as long as the underlying real U.S. economy continues to be productive, and as long as the world supply of dollars does not outstrip the world demand for dollars.
Dollars are suffering at the moment for two primary reasons: the attack on private industry by Obama’s policies, and the excessive world supply of dollars. Both of these factors drive down the value of a dollar, and drive up the number of dollars that a bar of gold commands.
by Sherry Jarrell
Learning from Dogs 
It is not a question of gold or dollars but of gold and dollars… in order to increase the chances of having at least something leftover.
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I only see one piece of the argument that I would like to have clarified, if possible —
It seems to me that you’re saying that the problem with gold is that its value is dependent on other peoples’ demand for gold, and that if gold was found to be toxic, the price would drop “independent of the price of money itself.”
Why would dollars and other forms of currency be independent of this problem? Despite the fact that central banks can attempt to disguise the value of their currency to make it appear more valuable that it is, the reality is that if less people demand the dollar, then the value of the dollar plummets. Also, if the dollar was found to be toxic (which is very possible considering the rate at which the Federal Reserve historically increases the money supply) there would be massive drop in international and, to a lesser but still significant extent, domestic demand for the dollar, and it would suffer from the exact problem you lay out with gold.
I guess what I’m trying to get at is that I don’t see why gold and the dollar are at the end of the day any different. I see the value of both being a function of their demand and their supply. With gold, the supply is fairly constant, and so the demand is the major player in determining its value. However, with the dollar, demand is still important, but the supply is extremely unstable due to the fact that it is in the hands of a few central bankers who at any moment could do anything in the name of saving the economy, whether their intentions are good or not.
I hope I made my point clear — I’m definitely not the most learned person when it comes to the nature of moneys, but these thoughts just kind of occurred to me as I read.
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Hi Elliot,
Yes, very clear. The original impetus for the post was to warn people that gold is neither a substitute for currency, nor a superior investment, counter to what you may read in the papers or see in the ads. Unlike money, the value of gold is not derived from the productivity of the underlying economy. When you accept gold as payment, you are counting on an increasing demand for gold relative to its supply. When you accept a dollar as payment, you are first and foremost counting on the continued viability of the economy that creates the currency. That’s the difference between gold and dollars.
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Great, thanks!
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