If you look at a long term price history of gold, it’s apparent this metal is prone to huge multi year rallies as it demand surges, but also multi decade declines, which I can only attribute to demand dropping off for whatever reason. Maybe the “belief in the value of gold” surges and tapers depending on what happens in the economy.
According to Bloomberg price history, London gold traded at $35 a ounce (!) at the beginning of 1970. This exploded to $666 by late 1980. However, after this peak, the price of gold dropped steadily for 20 years - to about $255 in 2001. This was a long, stready decline, unlike a big crash like those which characterize stock market declines. After 2001, the price of gold surged once again - this time to almost $1800 in 2012, as we contemplated the unwind of the Euro zone and the implosion of the USD. Since 2012, the price of gold has obviously declined sharply to $1344 yesterday.
I don’t know what this is supposed to tell us, except that demand for gold spikes in certain situations as people crowds into the same trade at the same time. In the absence of these fundamental demand shifts, however, there does not seem to be much evidence that the value of gold is stable.
Dollars and euros are more liquid than gold. Presumably when currencies and economies feel stable, the added liquidity is a benefit. So there’s a tradeoff between liquidity and stability (as in retained purchasing power). And it’s also true that dollars will get interest (though not necessarily that much) if they are in short term cash equivalents. So the price changes in gold I think reflect the value of liquidity vs stability.
Liquidity is probably one reason, but not the only reason. Other factors probably helped drive the 30% per year average increase in gold prices from 1970 to 1980.
BTW, S2000 - in the “Investments” forum, under the thread “DFA vs. Vanguard”, I’m having a lengthy discussion with a couple of others about the merits/demerits of a certain investment strategy. If you have any expertise, I’d like to get your opinion on it.
In a nutshell, I posit that you should be able to achieve appropriate diversification/risk/return with only a handful of funds. The others say that my strategy is incomplete, at best. At worst, it’s a lawsuit waiting to happen.
I thought about making the liquid joke, but gold’s melting point is way above Farenheit 451.
My point was about liquidity VERSUS stability. Between 1970 and 1980, dollars couldn’t retain their purchasing power, so “illiquid money” (i.e. gold) became much more in demand. The change in demand drove the price, primarily.
Then in the 1980s, we had a booming economy and stock market (so stocks were a more attractive alternative to gold than they were in the 1970s), plus inflation stopped (so the purchasing power fear was mitigated) and interest rates were high (so that the idea of collecting interest on treasurys as opposed to nothing on gold appealed) made gold prices collapse.
So yes, it’s the economic environment, but liquidity is one of the main reasons why we don’t run around with gold coins in our pocket and prefer to use pieces of paper or checks (or credit cards), and my argument is about the tradeoff between liquidity and the ability of liquid currencies to retain their purchasing power (and generate interest) and how it’s the change of that tradeoff that drives gold prices over the long term.
I know a little about a lot of things; this one I found on Wikipedia.
When I was a warhead designer we had a Convex supercomputer at our company, then got another. The new one had stricter requirements for passwords, and my password on the old one wasn’t compliant. Unix systems have a file with encrypted passwords, so, hoping that the encryption algorithms were the same, I copied the encrypted password from one to the other.
But what does “basis” even mean? You can have a logical basis why you think a stock will go up, and everyone nods their heads about how smart and logical your analysis is, but the stock doesn’t go up. You can have no basis other than intuition, and be right. I’m not overly concerned with proving “basis” in my personal investment decisions since I don’t have to sell the board of directors on it, just pull the trigger.
It’s actually hard for me to comprehend how Americans can’t see the basis. I work with people from all over the world and the growing feeling is that it’s already a done deal, inevitable. Yet when I talk to my American friends they find it all highly improbable, or “irrational gloom and doom”. I find these vastly different perceptions of the situation fascinating.
Anyhow it’s not that I “want” anything one way or the other. I bet against subprime and did well, I didn’t “want” subprime to do anything, just observed and made investment decisions based on what seemed obvious to me. Bubbles DO “want” to pop, and I think this one pops. That’s the way I’m betting, it’s just hard to know WHERE you bet in this unprecedented scenario.
Christ, I’ve got to write my performance review…rather talk gold.
Anything is possible. Investments are about predicting the probability that some event will be realized, and paying a good probability weighted price for that outcome. If, like the original post describes, we are talking about a scenario where global currencies are debased and finance collapses to the point that we realize the benefits of holding physical gold over exchange traded gold… well, that is possible too. But how much of a premium are you willing to pay to benefit from this scenario? Of course there is some “basis” for believing that this could possibly happen, but is this worth 10% premium to you? 5%? 0.1?
That’s not the only reason to hold the physical though. There are plenty of reasons to steer clear of GLD and (especially) SLV that are much more practical and realizable than a currency crisis.
Even if it is true that everything ends – how do you determine the likelihood for it to end in your short lifespan? Surely it is only worth acting on if you can benefit from it, no?
I think it has to do with potential monkey business with the underlying gold in the gold ETF being lent out as collateral and the potentials for abuse to the extent that the true quantity of gold being held is uncertain.