Gold is not a 21st Century Investment

November 15, 2017 02:38 PM
The one overwhelming belief by many gold enthusiasts is that it has value because it is real. It is not simply paper backed by a promise. Are they right?

Gold is a store of value. All my friends say so.

They say that when the central banks finally screw things up to the point of collapse, gold will hold its value. They say If the funny little rocket man in North Korea finally launches a missile that hits something, count on gold far more than paper money. Or when Vladimir Putin decides to resurrect the Soviet Union, and fear has the world in its grip, gold will be a safe haven.

When a big storm wipes out the electrical grid, and there is no access to the banks, you can count on gold. No matter what happens in the world, gold will be a store of value. That sounds very comforting, until you think about it.

You Can’t Eat Gold
The theory is that gold will hold its value far better than paper fiat money in a crisis. But when you think about it— stop listening to William Devane commercials about runaway inflation— there is no difference between gold and fiat currency. Currency derives its value from the fact that both parties consider it a worthy and acceptable mechanism to conduct trade.

They are both willing to take currency in return for goods and services, and that is the only reason fiat currency has any value. Gold works the same way. It is an acceptable medium of exchange if everyone agrees that gold is an acceptable trade for goods and services. It is the belief that makes gold, just like currency valuable.

You can’t eat gold; it can’t generate power or be used to build a shelter. It has value because the parties engaged in the transaction think it has value as a medium of exchange. In that respect, it is no different than paper dollars.

Why Does Gold Have Value?
Gold has been around for most of recorded history.  Gold has been found in the Paleolithic caves dating back as far as 40,000 BC. The ancient Egyptians loved gold and used it for decorating and jewelry, but not as currency. For that, they used food and other usable items as a measure of exchange.

The Incas and Aztecs loved gold and used it in religious ceremonies and decorative architecture. The Ancient Greeks loved the stuff as well and consider gold a symbol of status. Gold is bright, shiny and pretty and people just loved having it around. They made jewelry out of it, decorated their homes, palaces and churches with it and even made place settings and drinking goblets with the stuff.

Having a stash of gold made other men jealous and attracted the attention of women. Women of the times loved gold jewelry and were attracted to the high status of men with lots of gold. Some women have always been attracted to rich, powerful men and nothing said rich and powerful back in the day like a nice stash of glittering gold. If you turned the beautiful metal into a necklace for the woman you desired, your odds of success increased substantially.

Eventually, some bright fellow figured out that you could trade gold for goods and services. The farmer that grew grain wanted to give his wife a golden bracelet that made her friends and their husbands jealous. The guy that cleaned stables was looking for a wife and having some gold made that a little easier. They would take gold in exchange for what was needed or desired, and gold became an accepted medium of exchange.

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About the Author

Tim Melvin is a 27-year veteran of the financial services and investment industry who has served as a broker, advisor and portfolio manager. He specializes in value investing. @timmelvin