When considering whether gold is a value investment, one needs to
first recognize that gold does not have a balance sheet, management
team, price-earnings ratio or any of the other things one needs to
analyse before making an investment. Also, gold does not generate any
cash flow, so it does not pay a dividend. We can therefore conclude from
these observations that gold is not an investment. Indeed, it is
something different, which means that normal investment analytical
techniques cannot be used to determine gold’s value.
Value of course arises from an item’s usefulness, and gold is
useful because it is money. Though only used as currency these days in a
few places like Turkey and Vietnam, gold is still useful in economic
calculation, or in other words, measuring the price of goods and
services.
For example, when the Maastricht Treaty was signed in February
1992, one barrel of crude oil cost $19.00, €15.95 (Dm 31.30) or 1.67
goldgrams. Now it costs $91.79, €71.27 or 1.61 goldgrams, which makes
clear that not only is gold useful in communicating prices, it preserves
purchasing power. Gold has been useful in these ways for over 5,000
years, so it is logical to assume that gold will remain useful for the
foreseeable future.
Some say that the gold price rises and falls, but they are grabbing the wrong end of the stick. It
is the purchasing power of national currencies that rise and fall. Here
is an analogy to make this point clear. When standing in a boat and
looking at the shore, it is the boat (currencies) – and not the land
(gold) – that is bobbing up and down.
Currency fluctuations occur in the short-term, but over the
long-term, a currency’s purchasing power is continually eroded from
inflation and other debasements inflicted on it, as is clear from the
example above showing changes in the price of crude oil. There is,
however, a subtle but more important point to make here.
Gold does not create wealth. It cannot possibly do that because it
does not generate cash flow. Remember, gold is not an investment; it is
money, and these two things are entirely different. So when the price of
gold rises, wealth is simply being transferred from people who hold
currency to people who hold gold. This wealth being transferred already
exists. It is wealth held in the form of purchasing power.
Lastly, is gold good value? This is a question that each of us must
answer by ourselves because value is subjective. But to me the answer
is clear. Gold is indeed good value because it is a useful money, not
prone to the problems perennially plaguing national currencies.
Further, gold is good value because it is not over-priced, a
conclusion that can be reached by simply considering supply and demand.
Even though the gold price has been rising this past decade, the supply
of national currencies is being created much faster than the supply of
gold. Second, the demand for gold understandably continues to rise as it
offers a safe-haven from the ongoing turmoil of the interrelated bank
insolvency and sovereign debt crises that have been riling national
currencies. These crises have not ended, so I expect this supply/demand
relationship will continue. Therefore, gold will become more highly
valued in the months ahead, meaning that its purchasing power will rise.
At some point in the future, which cannot be predicted, gold will
become overvalued. Its purchasing power will exceed historical norms. To
give but one possible example, maybe a barrel of crude oil will only
cost 0.50 goldgrams or less. When that moment arrives, it will be time
to reduce your gold holdings to buy undervalued investments or to
purchase some consumer goods with your savings, which is the gold you
are accumulating now while it remains undervalued. I suspect that we are
still many months, if not years, away from that event because gold is
far from being overvalued.
