Gold as an investment
April 28, 2010 2:01 PM Subscribe
Is gold a currency, or a commodity? Both? something more complicated?
As an investment, does it work more like a currency, or commodity or something else?
As an investment, does it work more like a currency, or commodity or something else?
Gold is commodity: its price changes over time, like any other. Some people, believing that gold is inherently more valuable than any government backed currency, argue gold should be USED as currency, but this is more a political statement than a common practice.
posted by StrikeTheViol at 2:24 PM on April 28, 2010
posted by StrikeTheViol at 2:24 PM on April 28, 2010
Gold used to be a currency both directly and by way of a system of exchange for currency, called a Gold Standard (there are different versions of a gold standard, of course. The Wikipedia article is pretty good at explaining this). This pretty much ended sometime in the early 70's, IIRC. Pretty much every nation is on some form of fiat currency at this point. Many nations, including the US, still hold large amounts of gold reserves, but this is primarily just for its nature as a highly stable asset. The value of these gold reserves are just based on free market value.
Of course, there's a pretty serious economic incentive for any one nation to not sell off all of their gold reserves for liquid currency, as such a glut in the market would drive down price (and therefore value), and liquid currency is much more volatile than bullion in terms of it susceptibility to market pressures.
posted by The Esteemed Doctor Bunsen Honeydew at 2:25 PM on April 28, 2010
Of course, there's a pretty serious economic incentive for any one nation to not sell off all of their gold reserves for liquid currency, as such a glut in the market would drive down price (and therefore value), and liquid currency is much more volatile than bullion in terms of it susceptibility to market pressures.
posted by The Esteemed Doctor Bunsen Honeydew at 2:25 PM on April 28, 2010
That is to say, it was once a currency and commodity, now it's just the latter, although a highly stable one due to functionally infinite shelf-life, consistent demand, and finite global supply.
posted by The Esteemed Doctor Bunsen Honeydew at 2:27 PM on April 28, 2010
posted by The Esteemed Doctor Bunsen Honeydew at 2:27 PM on April 28, 2010
It's a real, real good conductor. If you have lots of real money, get gold wires for you sound system and for your cookware. It's shinny and stuff if it's processed right, and you can make pretty things out of it, but only if you mix in some other metals (all by it's self it's much to soft to be used for much of anything.)
Since people want it, it is a commodity. Because of the shiftiness, and it's ability to be diluted helped, once long, long ago many places used it as a part of their currency.
I think we should go to the Almond Standard, at least you can eat them if you have to.
posted by Some1 at 2:33 PM on April 28, 2010
Since people want it, it is a commodity. Because of the shiftiness, and it's ability to be diluted helped, once long, long ago many places used it as a part of their currency.
I think we should go to the Almond Standard, at least you can eat them if you have to.
posted by Some1 at 2:33 PM on April 28, 2010
Best answer: Say you have a gold coin, issued by a government a hundred years ago.
It has value as a commodity, because the coin contains gold.
It has value as currency (face value of the coin), assuming the government's still around.
It has numismatic value, because, well, it's an old coin.
Most gold coins being issued today are valued for their value as a commodity. (The currency value and numismatic value, even for "limited editions", are usually pretty slim.)
So, for instance, in 2002, a 1933 Double Eagle was auctioned off for $7.5 million. That price reflects the numismatic value (an incredibly rare coin), and not the face value of the coin ($20) or the gold value (roughly, .9675 ounces of gold).
posted by QuantumMeruit at 2:41 PM on April 28, 2010
It has value as a commodity, because the coin contains gold.
It has value as currency (face value of the coin), assuming the government's still around.
It has numismatic value, because, well, it's an old coin.
Most gold coins being issued today are valued for their value as a commodity. (The currency value and numismatic value, even for "limited editions", are usually pretty slim.)
So, for instance, in 2002, a 1933 Double Eagle was auctioned off for $7.5 million. That price reflects the numismatic value (an incredibly rare coin), and not the face value of the coin ($20) or the gold value (roughly, .9675 ounces of gold).
posted by QuantumMeruit at 2:41 PM on April 28, 2010
You ask three separate questions (impressive in such a short amount of text).
1) It is most certainly a commodity. It has a real, but fairly limited, use in industry, and hence has value the same way oil has value.
2) It has been used as a currency in the past, across many different groups. It has several attributes which make it useful as currency. First is that it's easy to alloy (US Gold Coins were 90% gold, hard enough to not get destroyed in use). Second is that it's rare, and difficult to fake. In the modern world, it's not too difficult to fake gold bars (tungsten has a very similar density), but even now, fake coins are fairly difficult to do well.
In modern times, the inability to just create more gold, the way we can create more fiat currency, is the major argument you'll hear. It works both ways, since there are legitimate reasons that you may want to create more money (flexibility & stability, and also... population grows, more people means more need for currency). Remember that both gold standard, and our modern fiat money system had pretty horrible economic crashes at various times, so neither solves that problem.
3) As an investment. Gold doesn't do anything. It sits there. Reflects light. It's not an investment the same way a stock is. And it's also not an investment the same way a house is. A stock is a claim to a very small portion of other people's work, and house provides a constant low level of value (you can live in it). Houses are also not fungible, so if you know what you're looking for, buying underpriced property is possible, making it an investment.
Gold does fluctuate in value, depending on supply and demand, along with speculation, and the whims of the market. But not by much. It's much better to think of gold as a way to store wealth, and not as a way to create wealth. For example, the (probably not quite true, but close enough) example is that in Ancient Rome, an ounce of gold would deck you out in a well made set of clothes. And today, an ounce of gold will buy you a nice suit. (examples, take with grain of salt, pro gold website)
posted by cschneid at 2:50 PM on April 28, 2010 [1 favorite]
1) It is most certainly a commodity. It has a real, but fairly limited, use in industry, and hence has value the same way oil has value.
2) It has been used as a currency in the past, across many different groups. It has several attributes which make it useful as currency. First is that it's easy to alloy (US Gold Coins were 90% gold, hard enough to not get destroyed in use). Second is that it's rare, and difficult to fake. In the modern world, it's not too difficult to fake gold bars (tungsten has a very similar density), but even now, fake coins are fairly difficult to do well.
In modern times, the inability to just create more gold, the way we can create more fiat currency, is the major argument you'll hear. It works both ways, since there are legitimate reasons that you may want to create more money (flexibility & stability, and also... population grows, more people means more need for currency). Remember that both gold standard, and our modern fiat money system had pretty horrible economic crashes at various times, so neither solves that problem.
3) As an investment. Gold doesn't do anything. It sits there. Reflects light. It's not an investment the same way a stock is. And it's also not an investment the same way a house is. A stock is a claim to a very small portion of other people's work, and house provides a constant low level of value (you can live in it). Houses are also not fungible, so if you know what you're looking for, buying underpriced property is possible, making it an investment.
Gold does fluctuate in value, depending on supply and demand, along with speculation, and the whims of the market. But not by much. It's much better to think of gold as a way to store wealth, and not as a way to create wealth. For example, the (probably not quite true, but close enough) example is that in Ancient Rome, an ounce of gold would deck you out in a well made set of clothes. And today, an ounce of gold will buy you a nice suit. (examples, take with grain of salt, pro gold website)
posted by cschneid at 2:50 PM on April 28, 2010 [1 favorite]
Best answer: The answers here are mainly correct, I will just add a few points.
1) Gold has conventionally been used as a store of value, that is as a hedge against inflation in other currencies. There is no reason other then convention (everyone else is doing it) why you would pay $1100 an ounce for a metal.
2) gold has industrial uses, and absent its use for jewelry and as a store of value (which overlap nicely in the golden bangles adorning the arms of middle class Indian housewives) you would guess its long term price would be around its marginal cost of production, say $500-700 the last stuff I saw, if anyone has any more recent figures I would love to see them.
3) gold's history as an actual currency or as the backing for a paper currency (gold standard or, slightly different, a gold-exchange standard) is short lived, say early 1800s-1935. Its just too valuable for everyday transactions so for most of history we have had a silver standard.
posted by shothotbot at 3:35 PM on April 28, 2010
1) Gold has conventionally been used as a store of value, that is as a hedge against inflation in other currencies. There is no reason other then convention (everyone else is doing it) why you would pay $1100 an ounce for a metal.
2) gold has industrial uses, and absent its use for jewelry and as a store of value (which overlap nicely in the golden bangles adorning the arms of middle class Indian housewives) you would guess its long term price would be around its marginal cost of production, say $500-700 the last stuff I saw, if anyone has any more recent figures I would love to see them.
3) gold's history as an actual currency or as the backing for a paper currency (gold standard or, slightly different, a gold-exchange standard) is short lived, say early 1800s-1935. Its just too valuable for everyday transactions so for most of history we have had a silver standard.
posted by shothotbot at 3:35 PM on April 28, 2010
Best answer: Modern gold is primarily a commodity, but it still has some aspects of currency to it. It's easily divisible into smaller amounts, is fungible (any piece of a given purity, barring special numismatic value, is replaceable with any other piece of the same size), and is quite durable, particularly when alloyed with other metals, like copper. It's also an extremely liquid market; converting gold into paper currencies is guaranteed, although you'll want to hunt around for a reputable broker.
As others are saying, gold is primarily a way to store a lot of value in a small space, and to protect yourself against inflationary monetary policies. In normal times, it's not at all a good investment, because it doesn't do anything for you; it just sits there. These are, however, not normal times. In our environment of super-loose money supplies and zero interest rates, it's likely to go up quite a bit more from here. However, you pay about a 5% conversion fee each time you switch between paper money and gold, much like you would with a currency. It's generally not something you want to try to 'flip'. It's very much a buy-and-hold sort of a thing.
It is not the screaming deal that it once was, and the risk in buying gold today is much higher than it was ten years ago. However, my biggest fear in recommending gold to people, say, five or six years ago, has now evaporated; I no longer worry about an immediate deflationary crash. You're more likely to lose SOME money, but much less likely to lose it all. I was very concerned that people might overdo it and then get caught in a liquidity crunch and lose their life savings, so my recommendations were very muted. I'm less worried about recommending it now, but price risk is much higher than it was, and potential payoffs are smaller.
The economy tried hard to crash, and we firmly chose the alternate path, more of the same debt issuance that made us sick in the first place. Because of that, I suspect that prices will go much higher before they peak. I also expect more deflationary waves in the future, and you could easily see enormous setbacks in gold pricing, but unless you see signs of real fiscal discipline on the parts of central bankers and governments worldwide, they're likely to be temporary. If they're still spending like drunken sailors, big price setbacks are probably buying opportunities.
Overall: if you decide to buy gold, don't overdo it... putting all your eggs in one basket is a BAD idea. If you take a position, do so slowly. Nibble a little at a time, buying dips. If you see big upward movements in price, don't let that scare you into buying, and if you see big downward plunges, don't let that scare you into selling. It can be a very tough market. Remember there are many thousands of professional traders out there who will rip your lungs out and eat them for dinner. Once you have your position, don't pay too much attention to short-term price moves, and never act in haste.
Finally, never buy numismatic coins. Never, never, not ever. Numismatic coins are a crock. You will pay far too much, will be able to sell for far too little, and will compound losses or cripple gains. Stick purely with bullion coins or one of the various funds that buy gold. If you buy physical, American Eagles have a mysterious price premium in the market... for some reason, they command higher prices on both the buy and the sell. You'll probably get a scoche more leverage if you buy coins with less of a markup, but it will be very small. And Eagles are super-easy to move, almost anywhere, if you need to.
posted by Malor at 5:48 PM on April 28, 2010 [1 favorite]
As others are saying, gold is primarily a way to store a lot of value in a small space, and to protect yourself against inflationary monetary policies. In normal times, it's not at all a good investment, because it doesn't do anything for you; it just sits there. These are, however, not normal times. In our environment of super-loose money supplies and zero interest rates, it's likely to go up quite a bit more from here. However, you pay about a 5% conversion fee each time you switch between paper money and gold, much like you would with a currency. It's generally not something you want to try to 'flip'. It's very much a buy-and-hold sort of a thing.
It is not the screaming deal that it once was, and the risk in buying gold today is much higher than it was ten years ago. However, my biggest fear in recommending gold to people, say, five or six years ago, has now evaporated; I no longer worry about an immediate deflationary crash. You're more likely to lose SOME money, but much less likely to lose it all. I was very concerned that people might overdo it and then get caught in a liquidity crunch and lose their life savings, so my recommendations were very muted. I'm less worried about recommending it now, but price risk is much higher than it was, and potential payoffs are smaller.
The economy tried hard to crash, and we firmly chose the alternate path, more of the same debt issuance that made us sick in the first place. Because of that, I suspect that prices will go much higher before they peak. I also expect more deflationary waves in the future, and you could easily see enormous setbacks in gold pricing, but unless you see signs of real fiscal discipline on the parts of central bankers and governments worldwide, they're likely to be temporary. If they're still spending like drunken sailors, big price setbacks are probably buying opportunities.
Overall: if you decide to buy gold, don't overdo it... putting all your eggs in one basket is a BAD idea. If you take a position, do so slowly. Nibble a little at a time, buying dips. If you see big upward movements in price, don't let that scare you into buying, and if you see big downward plunges, don't let that scare you into selling. It can be a very tough market. Remember there are many thousands of professional traders out there who will rip your lungs out and eat them for dinner. Once you have your position, don't pay too much attention to short-term price moves, and never act in haste.
Finally, never buy numismatic coins. Never, never, not ever. Numismatic coins are a crock. You will pay far too much, will be able to sell for far too little, and will compound losses or cripple gains. Stick purely with bullion coins or one of the various funds that buy gold. If you buy physical, American Eagles have a mysterious price premium in the market... for some reason, they command higher prices on both the buy and the sell. You'll probably get a scoche more leverage if you buy coins with less of a markup, but it will be very small. And Eagles are super-easy to move, almost anywhere, if you need to.
posted by Malor at 5:48 PM on April 28, 2010 [1 favorite]
Gold is a certainly a currency here in Vietnam. Expensive stuff (such as houses and vehicles) is often priced in gold. People sometimes pay directly in bullion, but more often convert into US Dollars or Vietnam Dong at the prevailing exchange rate.
posted by Etaoin Shrdlu at 6:55 PM on April 28, 2010
posted by Etaoin Shrdlu at 6:55 PM on April 28, 2010
It's a real, real good conductor..
Actually, it's marginally worse than silver and copper, and both are dramatically more abundant. Generally you use gold plated connectors, because gold is more resistant to corrosion than the other two I mentioned. It's industrial applications are due in part to its ability to be made real, real thin. All those connectors, heat shields, and particle deflectors would be infeasible at current prices without it.
As a currency, a unit of trade, keep in mind that there's less than an ounce of gold per person in the world. You'd have to dilute it with other metals to meet economic exchange needs globally today. Moreover, it depends on where you live on whether it's effective as a currency. I don't think you'll be paying for groceries with gold anytime soon anywhere in Chicago.
As an investment, gold pays no dividend and you can't eat it in a crisis. Your return depends on population growth driving demand for gold above our current ability to extract it. My present observation is that a lot of financial innovation in the area (Gold ETFs) have made it easier to buy and own gold, but have done nothing to make gold more useful or efficient. In other words, a bubble. If you want to invest in it, I doubt I can talk you out of it, but I'll suggest a well balanced portfolio can reduce your risk.
posted by pwnguin at 8:26 PM on April 28, 2010
Actually, it's marginally worse than silver and copper, and both are dramatically more abundant. Generally you use gold plated connectors, because gold is more resistant to corrosion than the other two I mentioned. It's industrial applications are due in part to its ability to be made real, real thin. All those connectors, heat shields, and particle deflectors would be infeasible at current prices without it.
As a currency, a unit of trade, keep in mind that there's less than an ounce of gold per person in the world. You'd have to dilute it with other metals to meet economic exchange needs globally today. Moreover, it depends on where you live on whether it's effective as a currency. I don't think you'll be paying for groceries with gold anytime soon anywhere in Chicago.
As an investment, gold pays no dividend and you can't eat it in a crisis. Your return depends on population growth driving demand for gold above our current ability to extract it. My present observation is that a lot of financial innovation in the area (Gold ETFs) have made it easier to buy and own gold, but have done nothing to make gold more useful or efficient. In other words, a bubble. If you want to invest in it, I doubt I can talk you out of it, but I'll suggest a well balanced portfolio can reduce your risk.
posted by pwnguin at 8:26 PM on April 28, 2010
This thread is closed to new comments.
posted by spikeleemajortomdickandharryconnickjrmints at 2:20 PM on April 28, 2010