Value of Gold lies in the Eye of the Beholder

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It is interesting to note that the value of some assets are based on their ‘likeability’ and some can provide hedging options against financial disasters.

Gold inspires an emotional response among people, called ‘likeability’ which can trigger impulse-buying and is inexplicable to those who have never experienced the so-called ‘gold-fever’ response.

Gold bars
Gold inspires an emotional response among some people, called ‘likeability’ which can trigger impulse-buying. Nevsun Resources Ltd.

Let’s take the example of oil for an airline company. It buys huge quantities of oil for its daily operations. Sudden price hikes can affect its bottom line — therefore, airlines buy oil future stocks so they can enjoy the lower, guaranteed ‘futures price’ far into the future.

Without making things more complicated, I think it is safe to say that every commodity in the world can be used one way or another. With commodities, you can eat them (in the case of cattle) or drink them (in the case of coffee) or use them in different ways (in the case of fuels).

Playing the futures market can be used to good effect when it comes to many important commodities.

Gold however, is one commodity that is used for safe-keeping and nothing else. It is the only commodity where its whole purpose is to be stored, and then sold, at a later date. So then it becomes more a question of how ‘unlikable’ other assets are on any given day, in order to make gold ‘likable’ on any given day. And the answer, in many cases, seems to be mind boggling.

Gold prices are set solely by its ‘likeability’ as perceived by its buyers – and for no apparent reason it seems to gain or lose popularity with its fickle buyers.

Supporters of gold (so-called Gold Bugs) say that gold is a good inflation hedge, which means that it rises in value, as other assets lose value. But then again, it’s the worst of all evils in that gold is seen as a last resort by rational people, but will still go out and buy it on pure speculation making it an imperfect world — or more aptly, a perfect world for the less sophisticated investor.

When everyone was buying gold by the handful, the markets saw a huge influx of capital. From central banks, to individuals, they flocked with their money just to give it away, in order to get their hands on some of the precious metal. When other markets were seeing a fall in prices, gold saw an explosion spanning from early 2003 to 2013.

Those ten years saw the price of gold go from $343/ounce to $1693/ounce which is no small feat. But then again, people always forget one essential part of any speculation rally, or as others call it, asset bubbles. That which inflates, will always crash.

No surprise then, that this irrational market of speculation was hit with an unprecedented price crash!

The same people who had seen oil go from $40/barrel to $147/barrel knew that eventually it had to fall to again, finally settling around $90/barrel. As a logical market segment, oil saw a break in momentum, and hence, the price fell.

Gold saw a similar asset bubble burst. In the gold market, Goldman Sachs (oh, I love poetic justice and irony in the same sentence) took a needle to the asset bubble. Or, more like, ‘pushed it from the top of a stairwell’ by releasing a recommendation that gold was overinflated and was about to be corrected. Like some psychic who knew what was going to happen, or like the first domino in the series, prices started to fall as everyone started to dump the yellow metal. As it happens in any dumping, there was a period of depression where the price fell freely to where it stood a few days ago, the 3 year low of $1170/ounce.

Like the perfect predictor that Goldman was, the price was corrected to $1200/ounce.

It is funny to see that a few months ago the new rage of the investing world was BitCoin. BitCoin is a commodity with no intrinsic value and which derives its value solely from what people imagine they might be willing to pay for it on any given day. So one day it can be worth a million and the next it can be selling for dime a dozen.

Sounds bonkers, right?

Not when you see that gold lives within the same valuation system, being based on what people think they want to pay for it, rather than being valuable in itself. How do you determine what the actual value of such an asset should be? It’s more likely to hit a bulls-eye in the dark, with a blindfold on, standing a 100 metres away from the board — than be able to guess the correct price of gold at any point in time.

Who might accurately guess such things?

And while we are talking about valuing something based on what people think its value should be, we really don’t want to go down the dark path of that kind of superficial society. A society where physical attributes and beauty are ranked from a scale of 1-10 rather than based on other, more important attributes. Imagine what kind of a narcissist world that would be…

Now, where can I find a GOLD MAN anyway?

© Zain Naeem

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