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