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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. [Let me explain the value of gold further.] Words: 631
The comments above & below are edited ([ ]) and abridged (…) excerpts from the original article written by James Turk (goldmoney.com)
How Does Gold Differ from Fiat Currencies?
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. 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…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.
Is Gold an Investment?
When considering whether gold is a value investment, one needs to first recognise that gold does not:
- have a balance sheet,
- have a management team,
- have a price-earnings ratio
- or have any of the other things one needs to analyse before making an investment.
- 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.
How is Gold Useful?
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…
Is Gold Good Value?
…[While] value is subjective, to me…gold is indeed good value because:
- it is a useful money, not prone to the problems perennially plaguing national currencies.
- 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…
- 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 years ahead, meaning that its purchasing power will rise.
What Does the Future Hold for the Value of Gold?
At some point in the future, which cannot be predicted, gold will become overvalued. Its purchasing power will exceed historical norms… 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. [That is why it is important to continue] accumulating gold now while it remains undervalued.
I suspect that we are still many years away from that event because gold is far from being overvalued.
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