Do you believe that gold has tripled its intrinsic value over the past 5 years? Or that virtually all other assets have lost 2/3 of their intrinsic value during that same time frame? Gold has very little intrinsic value (to my mind, at least), especially before the electronics revolution, and it is as subject to the whims of investors as any other asset. If you buy gold at $1700 today and it drops back to $500 in five years, you'll see the same loss as if you bought $1700 of Google and it dropped to $500. While I agree that gold cannot be multiplied indefinitely, the same applies to many (indeed most) other assets. The price of homes has no fixed limit, but neither does the price of gold. This is especially true when the market sells gold futures and such that are not necessarily backed by physical gold.
> But wait, couldn't this be said of stocks either? Exactly! Long-term savers will know this and not panic much. But those who talk about "wealth that evaporated" -- they were likely trading and speculating for a paper profit next week or month, not for "value-investing" or "storing savings". So both you and me shrug at them and say, "look again, no real wealth did evaporate! No factory collapsed, no car or house mysteriously disappeared..."
On this part, I agree. True wealth doesn't evaporate when the market drops. (That's not to say that a drop in the market can't hurt long-term wealth production; i.e. economic growth vs recession.) As you said, houses didn't fall down. Nothing changed except some paper values.
But then, anyone who understands how markets work should understand that wealth is not truly created or destroyed by trading in the markets. It's just exchanges of wealth. If you've got a share of stock and sell it to me for $100, the same wealth exists after the trade. If I turn around and sell that stock to someone else for $50, the same wealth still exists. The paper value of that stock might change, but no actual dollars disappeared as a result of the transactions. I lost money, but the economy did not. (I do believe that stock and commodities exchanges can themselves be real wealth, though, in the same way a village market is wealth.)
> you're thinking of golds meager utility as a "commodity" and you're right -- but almost non-existent commodity utility is its greatest strength as a reserve and savings asset -- there is no competing usage so it can fully absorb value without disrupting anyone else's business or livelihood. Just ask the central banks of the world, the kings of the past, the Chinese, Indians, Russians, Brazilians... or our grandparents! This stuff is not only virtually undestructable over centuries; neither can it be diluted or produced at will -- the physical kind, that is:
Gold has historically been used as a reserve of wealth because it's malleable (so can be formed and/or split for convenience), abundant enough to be feasible for currency use, relatively simple to purify, and because people wanted it. The only things that are compelling about gold in modern times is that people want it and that it has a limited supply. Unfortunately, gold is also very limited as an investment. As far as assets go, it's historically not done as well as other asset types. Gold has some "intrinsic" value, but it's value doesn't really increase (nor generally does its price over the long term). In comparison, a dollar in a bank account draws interest (though lately that's negligible) and a share in a company may grow in real value as that company's profits increase.
> That's its strength, it can absorb unlimited nominal "value" -- if houses couldn't be built from the ground up, they'd be almost as "good as gold" -- just not as durable, fungible, divisible, portable and compact. Plus "housing" implies a competing "social" use. "Do not speculate in houses, people need to live in them", some will moan -- "do not speculate in pork bellies, people need to eat", some will moan. Who will complain about physical gold being "overpriced"?
No one will complain about physical gold being "overpriced". They'll complain about the drop afterward. This is what happened with housing as well. Very few were complaining about the price on the way up as they indebted themselves to buy 2x what they could afford and 3x what they needed. But they sure complained when home prices started dropping. If everyone were putting their money into gold, you could be sure they'd start screaming about their "retirement funds" when gold started dropping.
> This is the best part... physical gold is a steal as its current price is still being 'discovered' exclusively on the paper commodity exchanges, where new demand is still largely met with freshly printed certificates. Paper gold, I agree, is highly overvalued. That means, physical gold today is tremendously undervalued! Even gold in the ground, not yet mined, is already being traded in paper by speculators! It will be a spectacle one fine day when they try to collect in specie -- if ever. They're in it for the paper profit and sure enough they will be paid off in nominal terms.
I don't agree with this assessment. Physical gold is by and large priced to match the paper variety. When prices fall on the market, they'll fall for physical gold as well.
Do you believe that gold has tripled its intrinsic value over the past 5 years? Or that virtually all other assets have lost 2/3 of their intrinsic value during that same time frame? Gold has very little intrinsic value (to my mind, at least), especially before the electronics revolution, and it is as subject to the whims of investors as any other asset. If you buy gold at $1700 today and it drops back to $500 in five years, you'll see the same loss as if you bought $1700 of Google and it dropped to $500. While I agree that gold cannot be multiplied indefinitely, the same applies to many (indeed most) other assets. The price of homes has no fixed limit, but neither does the price of gold. This is especially true when the market sells gold futures and such that are not necessarily backed by physical gold.
> But wait, couldn't this be said of stocks either? Exactly! Long-term savers will know this and not panic much. But those who talk about "wealth that evaporated" -- they were likely trading and speculating for a paper profit next week or month, not for "value-investing" or "storing savings". So both you and me shrug at them and say, "look again, no real wealth did evaporate! No factory collapsed, no car or house mysteriously disappeared..."
On this part, I agree. True wealth doesn't evaporate when the market drops. (That's not to say that a drop in the market can't hurt long-term wealth production; i.e. economic growth vs recession.) As you said, houses didn't fall down. Nothing changed except some paper values.
But then, anyone who understands how markets work should understand that wealth is not truly created or destroyed by trading in the markets. It's just exchanges of wealth. If you've got a share of stock and sell it to me for $100, the same wealth exists after the trade. If I turn around and sell that stock to someone else for $50, the same wealth still exists. The paper value of that stock might change, but no actual dollars disappeared as a result of the transactions. I lost money, but the economy did not. (I do believe that stock and commodities exchanges can themselves be real wealth, though, in the same way a village market is wealth.)