Wednesday, March 20, 2013

Thoughts on Gold

I've started thinking about investing again, mostly because a couple of the things I've invested in in the past are beginning to creep up to the point that they might just turn a profit if I sell them.  Because of that I've been poking about the Motley Fool site more then I have in a while, under the theory it's always best to have as much info as you can process when making decisions, especially ones regarding money.  They had an article up this morning about gold and it got me thinking.  Dangerous, I know.

I know most people think of gold as a commodity, after all it is a physical object, one you can hold in your hand, but overall gold tends to work more as a currency, especially the way they function in this day and age.  Gold, much like the dollars you have in your wallet, has value mostly because we as a species say it does.  There are a number of modern applications for it in manufacturing and computers, but by and large it's value comes from two things, it's use in jewelry and it's use as a medium of exchange.

Now, first things first, I do not expect gold to go dropping in value any time soon.  The idea of gold being valuable is deeply ingrained in our collective consciousness at this point, and I can't see that changing anytime soon.  It is also often viewed as a way to protect wealth outside of banks or financial institutions, and with the near miss we recently had with the Cyprus government it may be more attractive then ever to people looking for that protection.

My concern with gold as an investment is that any gain is basically artificial.  Every day the amount of gold that has been removed from the earth increases.  Not by a huge amount, but it's there.  Basically, the only way to truly remove gold from the supply is to pull a Frodo and toss it into a volcano where it melts down and reenters the Earth.  It may be lost for a hundreds of years, it may be thrown into a bank's vault, both of which makes it harder to buy gold, but it doesn't decay, doesn't rust, doesn't break down except under the most extreme circumstances.  Now, the supply per person may go down, but the fast majority of the world's people are more concerned with food clothing and shelter then they are with shiny metal, so even that effect is diluted somewhat.

Now, none of this makes gold a bad investment, a good chunk of the stock market's value comes from speculation as to what companies will someday make instead of their actual performance.  The major difference is gold, and other precious metals to be fair, doesn't actually produce anything,  its only increase in wealth comes from what we collectively give to it.  It doesn't turn labor and raw materials into new products like most companies, it doesn't in and of itself generate any interest like a bond does, it simply gets its value, like most commodities, from what people are willing to pay for it, and that's the part that makes me nervous.

Historically speaking it will always be valuable, but all it would take is some scientist coming up with a way to create gold on the cheap, either by pulling it from the earth or manipulating atoms, or some other means beyond my ability to come up with to completely destroy any value it has.  Even new mining techniques, discoveries of new supplies, or something as hard to predict as a new fad could swing the value drastically.

Any investment carries similar risks, no mater how solid the company, how prime the real estate or how well rated the bond.  I guess my major issue with gold right now is simply that shared fantasy we have, that somehow this stuff is valuable simply because there's not a lot of it to go around, and because of that we should horde it, wear it, use it to decorate our public buildings, and otherwise use it as a symbol of status and wealth. I may someday invest in a gold mine, but I can't see myself every buying the stuff directly.  History may show me to be a fool for this, certainly there is money to be made, but I can't help but feel it takes skills and knowledge beyond mine to do so with the degree of safety I would want.

No comments:

Post a Comment