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.
Thanks for reading! If you want more articles like the one above visit our Facebook page (here) and “Like” any article so you can get future articles automatically delivered to your feed. You can also “Follow the munKNEE” on Twitter or register to receive our FREE tri-weekly newsletter (see sample here , sign up in top right hand corner).
Remember: munKNEE should be in everybody’s inbox and MONEY in everybody’s wallet!
Related Articles from the munKNEE Vault:
Today all currencies are fiat, that is, they are money only by government edict, by the law; they have no inherent value and are not backed by reserves. Because of this central bankers around the world can create/ print new money almost without limit, and as with all markets currency prices are set by the law of supply and demand, and as more dollars, euros, pounds and yen are created, their value falls. [Let me explain the ramifications of such action.] Words: 785
You have no doubt read countless articles on the price of gold costing “x dollars per ounce” and possibly own a gold ring or some other piece of gold jewellery but do you really understand exactly what you are buying? What’s the difference between 1 troy ounce of gold and 1 (regular) ounce? What’s the difference between 18 and 10 karat gold? Let me explain. Words: 637
For these investors looking to make a play on this elusive metal, we explore below every nook and cranny of the investing world to offer 50 ways to play gold.
Gold is not a solution to investing problems. It is an insurance policy against an inflationary explosion. The higher the probabilities of inflation, the more gold I hold. [Let me explain.]
The spectacular rally in the gold price over recent years [has] many observers asking if the precious metal has not moved ahead of its fundamentals…[and if it] has not entered speculative bubble territory. [To address that concern] I have calculated the purchasing-power-protection price of gold for the 43 years from 1970 to 2012 and compared it to the average market price for gold in every year [along with some background of events unfolding over each decade during that time period which should prove] useful as a framework for how to think about the [current] dollar-price of gold. [I think you will find it most enlightening. Take a look.] Words: 3973
It would seem that there is a considerable lack of understanding about what the term “safe haven” actually means when it comes to gold. Let me explain just what it means – and does not mean. Words: 740
Comments I have made that “when this [financial crisis] finally ends the big winners are apt to be the ones who have lost the least purchasing power. Keeping score in nominal dollars is likely to be meaningless. Gold tends to hold its purchasing power regardless of what happens to fiat currency.” have prompted questions about a) how to achieve such purchasing power with physical gold when this stage is reached, b) how to go about buying things with gold coins and c) how gold would be utilized under the assumption that a barter system would develop when dollars become worthless. [Let me explain.] Words: 700
We are in the midst of turbulent times, and it seems inevitable that things can only get worse. Most investors are of the opinion that gold is one of a very few areas of safety…however, when we look at historical charts, it is obvious that gold doesn’t always behave in the way we would expect. [Let me explain.] Words: 541
Do you own enough gold and silver for what lies ahead? If 10% of your total investable assets (i.e., excluding equity in your primary residence) aren’t held in various forms of gold and silver, we…think your portfolio is at risk. Here’s why. Words: 625
We are all focused on the short-term and that’s natural, but let’s step back and look at the longer-term picture…We know the debt levels are too high today…but, because less than 1% of world financial assets are in gold, we have yet to really see the gold market react to the massive global money printing binge of the last 10 years. Once the gold market starts reacting to all of this, that’s when gold is going to go exponential. It doesn’t matter whether investors are buying gold at $1,600 or $1,800, it’s irrelevant in the long-run. What’s important is they are invested in physical gold in order to preserve their wealth. [Let me explain why.]
I was taught years ago that “gold is not about price… gold is about value.” Be measured, be balanced and don’t make more of it than it is. Gold is just a tool, an anchor to sound money; to value. [Let me explain.] Words: 1120
Considering the fact that you can fool some of the people some of the time but you cannot fool all of the people all of the time, is it any wonder millions, both through the Tea Party demonstrations and now the Occupy Wall Street Movement across the country and elsewhere around the world, are protesting the abysmal scourge that fiat currency has brought upon us as a result of that fateful day back on July 25th, 1965. To appreciate the significance of that historic day we must fully understand what fiat currency is and why such a concept is about to implode and this article does just that. Words: 1372
‘Gold Bullion Or Cash’ is a well produced, high quality, educational short video that uses music, images, facts and quotations to show how gold has been a proven store of value throughout history and an important diversification today.
To fully understand gold’s role in an investment portfolio, we need to adopt a new mindset, a gold mindset which is, simply put: gold is not a bad investment, and gold is not a good investment. Gold is not an investment at all – gold is money.
In our travels to the Middle East, the Far East and South and Central America [we have found that] most people in those parts of the world see gold as the protector of wealth [as opposed to] in the West where it is viewed as a commodity for speculation… [That shouldn’t be the case. Let me tell you why.] Words: 2159
A look at the gold price over the past 177 years reveals that – surprise, surprise – gold could be the safest investment out there! Words: 1377
Have you ever wondered what money really is [and why we need to own some gold as a result]? You’ll notice that everyone you read has a strong opinion , but who’s right? [Let look at the situation and see if we can come to an answer that we both can agree on.] Words: 3086