Where Is Gold Going In This Market

[SiamRose]

I like to think that this thread would be boring if it just consisted of people saying how brilliant Gold is.

I quite agree.

Regarding gold as an investment, I would paraphrase Churchill talking about democracy. Gold is a poor investment (for reasons already mentioned), its only advantage is that its a better, safer, store of value than all of the other currencies out there.

The US government has created so much debt that it will be politically impossible to repay. I mean that the old fashioned methods of debt repayment; tax increases or spending cuts sufficient to repay the $14trillion owed ($20 trillion by the end of this decade) would be so painfull that voters would never accept them. Thus politicians will take the easy path of issuing more and more debt until no one will buy any more. At that point it will be too late and the US$ will be doomed. Other countries are in a similar position; Japan has a far higher debt to GDP ratio than even the US. Euro problems are well known. As the world's reserve currency if the US collapses it will likely drag down smaller currencies with it - especially trade dependent currencies like the Bt. So gold in many ways is the least bad alternative.

Edited July 25, 2010 by SiamRose

[Abrak]

Just a faith in a rear view mirror is not Fact

All you have is a reflection of what was not a guarantee of what will be.

I never look in the rear view mirror Flying because it is a worthless exercize.

If you look forward actually the 'only' thing you have is a 'guarantee' that the yield on your investment in the future will be zero.

To the extent I valued my company making US$100,000 profits which I believe will grow at 5% and I discounted it at 25% risk weighted basis. If you happen to believe that it will make nothing because the 'world is as such', that is up to you.

However when you look forward and see your future cash flows all you have is a guarantee that the discounted future cash flow of your investment is precisely zero. Therefore the value of your investment is equivalent to your terminal value at whichever rate you wish to discount it. Your terminal value is based on what the buyer perceives as the absolute certainty of zero future cash flows and his return will be based on the buyers certainty of absolutely zero cash flows.

The problem with basing the value of your investment on absolutely zero future discounted cash flows is that the future value of the certainty of absolutely no returns inherently must be very volatile as a store of value. And while I am basing my value looking forward on the basis of future risk weighted cash flows. You are looking forward on a discounted cash flow basis to the inherent value of something that you 'know' is inherently worthless. So to the extent we wish to look forward you are essentially trading a 'greater fool theory', the assumption that the absolutely certainty that the discounted future value of an asset with no inherent value is going to be worth more. And what worries me is while I discount my future cashflows quite highly due to the uncertainty of those cash flows to end up with my valuation, as you dont realize that the certainty of no returns is essentially nothing.

Clearly if you believe the certainty of no returns is worth more than the risk weighted value of my returns then you must have a very distorted view of risk because you are merely trading the absolute certainty of no future cash flows which is inherently nothing and likely to be extremely volatile as the gold price implies. How you can possibly say I am looking in the rearview mirror when I am valuing my investment on risk weighted future discounted cash flows while you look forward and are trying to perceive of the absolute value of the 'certainty' of absolutely nothing is beyond me. And to the extent you say I cannot guarantee that my investment will have future discounted cash flows, I at least can guarantee yours will not.

Edited July 25, 2010 by Abrak

[gregb]

Clearly if you believe the certainty of no returns is worth more than the risk weighted value of my returns then you must have a very distorted view of risk because you are merely trading the absolute certainty of no future cash flows which is inherently nothing and likely to be extremely volatile as the gold price implies. How you can possibly say I am looking in the rearview mirror when I am valuing my investment on risk weighted future discounted cash flows while you look forward and are trying to perceive of the absolute value of the 'certainty' of absolutely nothing is beyond me. And to the extent you say I cannot guarantee that my investment will have future discounted cash flows, I at least can guarantee yours will not.

I'm having a bit of a problem following your argument Abrak. This is my take on the subject.

I know the USD will eventually be worthless. I can't guarantee the exact day it will happen, but I am 100% absolutely convinced beyond a shadow of a doubt that one day the USD will return to its intrinsic value of 0. The logical extension of that means no matter how much cash flow you generate, unless you convert that to something with an intrinsic value like gold, you wind up with nothing in the end.

Now, gold may have little intrinsic value, but it is not 0. An extremely wealthy man with an oversupply of all the items known to man will always accept more gold. Even if he has a room full of the stuff, he will always take a little bit more. It's good for coating urinals if nothing else. The extremely wealthy can't necessarily accept more rice when they are already full, because it will simply spoil. But gold doesn't spoil, it doesn't need to be maintained, it never breaks, and it is shiny and pretty. That is why it became valuable in the first place. People do want it in unlimited amounts. There are very few other items you can make that claim about, or have that much certainty in.

So what I have is an asset with truly no intrinsic value, the USD, vs. an asset with a non zero intrinsic value, gold. We can of course argue over the exact amount above zero it is. But what that means is, no matter how much cash flow you generate, eventually my gold will be worth more than your fiat currency. Not only that. It will be infinitely more valuable. This is a mathematical certainty.

All that is left to argue about is the exact time that will occur. To argue against this conclusion, you have to argue that the USD will not eventually be worth nothing. I don't accept that. Every fiat currency ever conceived by man throughout history has eventually been worth nothing. What reason could you possibly have for believing the USD will be special in this regard?

Now, the interesting argument which we should be discussing, is what is the optimal strategy for converting cash to a tangible asset like gold, so as to maximize the amount of wealth you can accumulate. You clearly have a risk on your cash flows that does not exist with gold. And that risk, namely hyperinflation of your USD, actually makes your expected effective return negative at some point in the future, vs. 0 for gold. It mathematically MUST be negative because you start above zero, and eventually wind up at zero. Therefore, at some unspecified time, it will be better to have an asset with 0 cash flow, than an asset with an effective negative cash flow, even if the cash flow is nominally positive.

What I have said up to now is all a mathematical certainty. What remains to be discussed is the timing when this will occur. If I knew that, I'd be wealthier than Naam. Since I don't, I'm a struggling pauper. But it helps to keep reality in perspective. The real argument is timing, not the final result. Flying seems to think that will be settled soon. I'm not so sure, but since I don't have enough money to risk speculating in fiat currency, I convert all my fiat to gold. Possibly I could do better by putting it in asset with cash flow as you argue, but I simultaneously run the risk in that case that fiat will hyperinflate while I'm locked in that asset which will then be generating an effective negative, even though nominally positive cash flow.

I think that is the rearview mirror here. Refusing to look forward at the inescapable reality of collapsing fiat currency. There must be a specific time in the future, or in the recent past, when converting to gold is the optimal strategy. It is our job to figure out when that is. The fact that gold has been climbing on average at over 15% for the past few years may indicate that the optimal time is already passed. There are few investments that generate greater than 15% in dividends.

[AnnyLing]

Being convinced of something is not knowledge. Assumptions are not mathematical certainties. The fiat currency Swiss Franc was never worthless. Is Naam wealthy ?

[flying]

If I buy a business that makes 100,000 dollars a year for 500,000 dollars at least I have 100,000 dollars a year of income.

Just a faith in a rear view mirror is not Fact

All you have is a reflection of what was not a guarantee of what will be.

I never look in the rear view mirror

To the extent I valued my company making US$100,000 profits which I believe will grow at 5% a

How you can possibly say I am looking in the rearview mirror

Nuff said

Edited July 26, 2010 by flying

[SiamRose]

Every fiat currency ever conceived by man throughout history has eventually been worth nothing. What reason could you possibly have for believing the USD will be special in this regard?

Well, no. The fiat currencies still in use today are worth something; the US$, Bt, Chinese Yuan, Euro, etc. all have value. They may eventually be worth nothing, but then in the long run we are all dead. What matters is what will happen over the next 5 or 10 years.

[sokal]

There will be absolutely no demand pull inflation, only currency crisis inflation.

Just look at the trouble the Euro has been going through. Was there any demand pull inflation in the Euro zone ? No, but gold did make all time highs in Euro's. That is classic crisis inflation.

People are getting this whole inflation/deflation argument wrong.

you are getting it wrong as the EUR does not go through any trouble. more than half of EURoland's exports are shipped to countries which have USD-pegged currencies or free floating ones and the majority of continental Europe's industries is praying for a further lower exchange rates vs. a bunch of currencies.

When the Euro took its tumble a few weeks ago(I know it has stabilized for now), it lost value against the US dollar, gold and every other fiat currency. Everything from gas to oil, gold , copper, pork bellies and wheat got more expensive for people earning Euro's. That is inflation. That is the inflation "gold bugs" are always talking about.

I wonder how many german expats are praying for a lower exchange rates vs a bunch of currencies....

[sokal]

I wish we would stop this 'currency' argument because it is inherently pointless. Gold is not a currency and its very clear appreciation in value is a clear indication of that. I am not absolutely sure it is a commodity as it has very little use.

This is how I see things.

Currency has 4 uses.

(1) Medium of exchange.

(2) Deferred payment

(3) Unit of accounting

(4) Store of value

Given that gold will never be an actual currency, fiat money is inherently better at 1, 2, 3.

Given that both fiat money and gold are intrinsically worthless (in that both have no productive use), gold is increasingly seen as a better 'store of value' because it cannot be debased. I understand the bull argument to be that gold will increasingly be seen as a better store of value.

Clearly cash is not productive so it doesnt earn anything and its interest rate is tied to 1, 2, 3. Where I do absolutely agree with gold investors is that if you compare it in terms of value to a 10 year UST yielding 3%, I would rather die than buy that UST. Given that I think 3% 10 year bonds are complete lunacy and I guarantee that I can do better in value terms and that I perceive bonds as overvalued you might think that my argument is circular.

However it is an incredibly dodgy argument because gold has no intrinsic value, so to the extent it is a better store of value than fiat my argument is based on my 'perception' that 10 year USTs are lousy value. And this is the big problem. I think that 10 year USTs are a lousy investment and inherently have a negative value. So my 'perception' is that gold is better value than USTs inherently in that I would rather buy gold than 10 year USTs. Given that both are inherently worthless and the value of the bond is fixed my 'perception' must be wrong in which case gold must be overvalued or I am wrong in believing that I can make 3% p.a. over 10 years.

Anyway the point of my argument is this. To the extent people see gold as a better store of value than USTs goes without saying. The value of a UST is fixed and final. Whatever happens in my view - interest rates go 0 inflation to -5% I will never believe that lending to the US government at 3% over 10 years is anything but a bad investment. Simply put, for gold to go up people must think that 3% 10 year returns are a store of value and that is a big assumption. The buyers of gold must be people who currently believe that USTs and cash are good stores of value which seems to me to imply a certain degree of madness.

just when I thought there has been some progress on this thread, then I read this:rolleyes:

[sokal]

I cannot help but notice the fair amount of time you spend trying to convince yourself

Now Flying you are absolutely right there. I keep having these urges to sort of 'buy' gold. Now I did at one point think that gold had some inherent value due to its inverse correlation with risk but that has disappeared. Ultimately the value of gold is 100% determined by peoples perception of its value. It is non-productive, has no real yield, is not a currency as people suggest, has a lot of people who buy it because it goes up etc.. So in my view it is a very risky asset with virtually no fundamentals, doesnt even give a decent return against that risk in my view. So why do I have these urges to buy it.

I know it is tied to its total lack of fundamentals rather than its underlying fundamentals.

This is a link to an 12 hour lecture on Austrian economics. An Introduction to Austrian Economics by Hans-Hermann Hoppe and Jörg Guido Hülsmann Klampenborg, Denmark, 2005

[sokal]

The value of a UST is fixed and final.

Value is never fixed and final for anything, it will always be subjective and contextual.

I was refering to its underlying value in nominal dollar terms. Its price is clearly subjective and contextual.

The buyers of gold must be people who currently believe that USTs and cash are good stores of value which seems to me to imply a certain degree of madness.

<deleted>??? Anyone buying gold with cash must think otherwise. Those advocating that increasing the money supply is equivalent to increasing wealth are the mad ones.

No you totally miss my point. To the extent that increasing the money supply to increase wealth is madness and to the extent that people who believed that cash which is paper yielding nothing think that cash is a store of value, I believe they are mad. So someone who switches from cash to gold as a better store of value must be mad on the basis it implies that he thought cash was a good store of value. So I am not arguing that mad people who use cash to buy gold as a better store of value are not correct in their thinking as to why it is, I am simply arguing that they were mad to think of cash as a store of value in the first place.

I have no choice but to be paid in cash, just like everyone else. That doesn't mean that I think its a good store of value

[cloudhopper]

Every fiat currency ever conceived by man throughout history has eventually been worth nothing.

While this may be true it seems to me they have all been resurrected by new fiat currencies. Don't assume that gold is the only possible replacement for fiat. They still have the Amero, Globo, Bancor, SDR etc. to try...but in the event gold may get you more of that new fiat than the old fiat will be able to. Physical probably a lot more after all the windfall profit taxes they'll put on the traceable stuff.

[badge]

[...]

At that point it will be too late and the US$ will be doomed. Other countries are in a similar position; Japan has a far higher debt to GDP ratio than even the US. Euro problems are well known. As the world's reserve currency if the US collapses it will likely drag down smaller currencies with it - especially trade dependent currencies like the Bt. So gold in many ways is the least bad alternative.

I know the USD will eventually be worthless. I can't guarantee the exact day it will happen, but I am 100% absolutely convinced beyond a shadow of a doubt that one day the USD will return to its intrinsic value of 0. The logical extension of that means no matter how much cash flow you generate, unless you convert that to something with an intrinsic value like gold, you wind up with nothing in the end.

As previously mentioned, a currency cannot decline without another advancing. The USD cannot fail and drag down smaller currencies unless other currencies soar in value and drag yet more higher.

The US - and many other countries - have an unsustainable level of debt. If any implosion is likely, it is likely to be the debt that implodes, not the currency in which it is denominated.

Infact with less debt(frequently mistaken as 'printed money') in circulation post-implosion, the denomination currency could benefit.

A similar argument can be put forward for Physical Gold v Paper Gold; there is a completely undeliverable paper gold market 140 times the size of the physical gold market, so one may expect this paper gold to implode at some point in time too? Far less 'Gold' in circulation post-implosion could benefit Physical Gold.

Both of these theories are delightful, but sufficiently distant to be ignored, and thus of no aid to profitable speculation.

[cloudhopper]

Infact with less debt(frequently mistaken as 'printed money') in circulation post-implosion, the denomination currency could benefit.

A similar argument can be put forward for Physical Gold v Paper Gold; there is a completely undeliverable paper gold market 140 times the size of the physical gold market, so one may expect this paper gold to implode at some point in time too? Far less 'Gold' in circulation post-implosion could benefit Physical Gold.

Both of these theories are delightful, but sufficiently distant to be ignored, and thus of no aid to profitable speculation.

Exactly right IMO Badge. Hence the utility of physical gold and physical bank notes until the inevitable outcome becomes clear. That time could be not so distant and very disruptive.

[sokal]

Every fiat currency ever conceived by man throughout history has eventually been worth nothing.

While this may be true it seems to me they have all been resurrected by new fiat currencies. Don't assume that gold is the only possible replacement for fiat. They still have the Amero, Globo, Bancor, SDR etc. to try...but in the event gold may get you more of that new fiat than the old fiat will be able to. Physical probably a lot more after all the windfall profit taxes they'll put on the traceable stuff.

Fiat was invented through gold. Without gold there would be no fiat.

[cloudhopper]

Fiat was invented through gold. Without gold there would be no fiat.

Nonsense.

[sokal]

Fiat was invented through gold. Without gold there would be no fiat.

Nonsense.

Do you actually think somebody decided one day what the purchasing power of one unit of currency should be ? It sounds like you do.

The purchasing power of money is evolutionary and only determined by what the money bought the day before. It all started with barter and through barter,gold became the most marketable good. Then came banking and the idea of issuing paper notes that where redeemable in gold for the convenience of not having to carry the gold around.

Edited July 26, 2010 by sokal

[Abrak]

Ok. Thanks for everyones replies. Flying will be pleased to know that I am no longer deeply conflicted because I know now exactly why in my own mind I will not own gold and exactly why in my own mind Flying should be deeply conflicted (and isnt.)

BTW just because I have reached some conclusions, doesnt mean I understand gold, it is in my view an important asset that I dont understand and have a desire to understand. I will not really change my conclusion but the more you consider my arguments are bullshit, you can either consider it bullish for gold or I am an idiot. To the extent I am happen to agree with you, you should be worried. And to the extent that Naam thinks that I am simply stating the bleeding obvious he should remember I am an equity investor so I like a good gamble if it is one.

So I am about to argue that gold is overvalued which it is obviously but overvalued as a speculative investment. Now please do not take this seriously, because it isnt a serious subject and to the extent you think the very attempt to make a call on it is silly, well it is a gold thread, which is in essence silly and you have to bear in mind the total absence of any other argument beyond this is why it is going up or down is at least different.

First of all I totally agree with Sokal's logic and Gregb's so they should be worried. Flying will be pleased to know I am no longer investment conflicted but unfortunately think he should be.

They both do not claim that gold is a store of value. Also I 100% agree with Gregb's comment that it has an intrinsic value but I have no idea what it is. As an equity investor, it is theoretically zero. I suspect that Naam might be able to work out an intrinsic value based against the current price because he is a bond investor and values certainty of return and therefore he should place an intrinsic value on the certainty of no return apart from the differential value of that certainty.

So anyway here are my arguments.

First of all you have investors with idiotic arguments. Flying dismisses an investment argument on value which he inherently lost on the basis of 'Nuff said'. So the problem that people claim who accept the argument that their is no value argument should accept investors like Flying apparently claim their is. This reflects his view that certainty must be valued higher than uncertainty. When I say that I believe there will be x yield, I am clearly expressing uncertainty in those returns. When he states that he believes investment returns on an investment that he is absolutely certain will have no returns, he is simply expressing an opinion that he believes I am infinitely more stupid than him. Certainty of nothing and its underlying fundamentals does have value but clearly it is based on the discounted return on the terminal value. So those investors who do claim it really isnt a store of value should realize that Flying believes he has a value argument. The certainty of no returns is actually a concept rather than a value (which is intrinsically zero).

You simply cannot dismiss an argument that your belief in an investment is better value than my belief that uncertain returns of something on an investment with 'Nuff said'. First of all I know the very value of gold is based on very fixed funbdamentals - when he has the certainty of no cash flows he really has the certainty of zero. He has no idea of the inherent returns on my investment in terms of value but we are trading my uncertainty in returns against his certainty of no returns in yield. And even if he believes I am that stupid other people are not. So please accept Gregb and Sokal that to the extent you do not have or pretend to have a value argument, Flying is prepared to dismiss a value argument that he cannot win without me being stupid, therefore he must believe that there are people even more stupid than me in concept of the terminal value of gold. And when you dismiss an argument that you have lost with 'Nuff said' it is clearly a sign of rear view mirror perception. I said that because I know to the extent we are trading value it is essentially a concept that when he believes the value of his returns on an investment with no returns are higher than my beliefs in an investment with uncertain positive returns he has to be so stupid that he simply cannot assume I am more stupid than him.

I believe that gold fundamentally is essentially the swap of a very fixed set of fundamentals over time. I think that to an extent is why Sokal defines gold as cash and I think that is why Gregb compares its fundamentals against the dollar. I actually agree with Sokal on the theory that cash should be exactly that. I also agree with Gregb's view of the very uncertainty of the value of the US$. I would also agree that if we were to accept that the US$ is essentially worthless that the fact that the US$ is perceived as a store of value implies gold is worth more. A 10 year 3% UST (or whatever the current yield is) inherently valued on a risk weighted discounted cash flow basis that is the very definition of 10 year risk free return when it clearly isnt. It assumes a massively high probability of payment and an implication that its value will not have changed much against other assets. My problem with both Gregb's and Sokal's argument is that it is inherently a value argument of cash and bonds and I simply think to the extent they are right everybody knows it. Gregb's certainty that the US$ will be worthless so he buys gold will at some point work against him because a lot of investors assume that the US$ will eventually be worthless and do not. And it is long term value argument while they admit that gold is not a store of value.

So Gregb you have to admit that the concept that gold will go up because the US$ is rendered worthless and you are certain of that is setting the bar extremely low.

And I believe there several clear indications that, that argument the argument that you should by gold on the basis of a worthless dollar has gone way too far.

Sokal can only define gold as 'cash' on the basis that it will become cash. Theoretically its very fixed fundamentals, zero return, zero use fixed supply should mean very little volatility. But the ratio of the Dow Jones to gold has been 40:1 and the Dow Jones which is based on discounting uncertain fundamentals has a ratio of 5:1 with a reality that you would be incredibly stupid to buy at 4.5 or sell at 1.5. So the gold price has proven incredibly volatile because you are essentially swapping the absolute and certain fundamentals of a value of an asset of zero worth which has proven very volatile. You are basically swapping your perception of other peoples increasing uncertainty. Or sensibly you are hedging against the possibility that the expection of increasing uncertainty will increase. Please understand that as gold is not cash you are actually trading very fixed fundamentals against a very fixed underlying true value.

It is not cash or a currency. The volatility is simply too high because you would have to sell it against a currency at extreme values. You cannot buy a loaf of bread against it. It is not a currency either because the value of a currency is based on fundamentals. Even in Zimbabwe the concept of cash being debased does not essentially worry you in terms of the value of your house. It really is massively optimistic to assume that the potential debasement of the US$ will lead to gold appreciating in real terms against other assets. You cannot argue against the fact that cash has value as a short term asset, so you either argue as Gregb and Sokal do that the increasing worthless US$ will lead to another inherently worthless asset with a perceived value going up or you argue like Flying that it has an inherent value that it does not. If you believe that gold is fundamentally undervalued you are dreaming, if you believe that anyone treats cash as bonds as a store of value you should accept that is highly optimistic.

And there are two good reasons why your speculative argument on gold is wrong as a good punt.

The very speculative nature of gold but the comparison of gold to cash indicates that people put by far too low a discount rate on it. The concept that the 40:1 ratio of the gold to say the DJI means you should sell anywhere near 1 just implies so much stupidity at 5 that it will increase in value.

Given the absolutely and totally fixed nature of golds underlying fixed fundamentals the very fact that it has gone up 5 times makes it an incredibly speculative speculation.

And I believe this is the most important point. To the extent one is arguing over whether cash is treated more as a store of value or gold is. Or the perception that cash will be seen less as a store of value than gold is seen as as store of value. As Sokal and Gregb admit that it is not a good store of value, Gregb cannot argue that gold is a good long term investment against cash, because only thing that isnt a better long term investment is something you cannot store.

Now Sokal made makes a very good point that the US$ being described as a flight to quality is the ultimate bull market on the basis that it will be rendered worthless. What I believe the financial crisis proved is that inherently gold is now perceived as a risk asset. The fact that it went down rather than up shows the perception of cash being worthless is so overwhelming that increased risk led to a rush to increase cash. So if Sokal genuine believes there will be anew gold standard then he has some point but to the extent that the financial crisis could have led to the total collapse of the financial system and the rendering of the dollar as worthless, there is absolutely no point in arguing there will be a flight to gold or it would have gone up. Once it is a risk asset rather than a none risk asset you should understand that it is inherently not a risk asset out of the underlying risk of the fundamentals but on the underlying risk of the value. So acting like a risk asset does not represent an underlying overvaluation of risk because that is totally stupid, it by very definition represents an overvaluation of its price as the absolute no risk fundamental asset.

So as I see it that Flying is making a value argue when a value argument simply does not exist. You cannot make a value argument against the assessment that you are investing in an asset with zero yield. Gregb and Sokal are more along the lines that they know the US$ will be rendered worthless. But as that is a long term argument, there very admission that they do not have a value argument is an expectation that they expect a flight to gold. Which inherently means a flight to another worthless asset. The admission that gold has some worth but they do not consider it a store of value or they dont what it is but just think that the dollar being rendered worthless will mean the that gold appreciates is an axiom and then it performing as a risk asset when everyone knows it fundamentals clearly shows that you expect an increasing price based on increasing stupidity.

Gregb certainty that the US$ is worthless doesnt inherently mean the price of gold will go up in real terms. If Flying wishes to believe that his zero fundamental asset has value against a risk asset he assumes stupidity. And if gold is acting as a risk asset then it cant be because of risk of everyone I hope would accept that it is the very definition of a no risk asset in terms of fundamentals. So clearly the risk is in the price of a very the defined value of no risk. So when you have no value argument you are left with a greater fool theory and the concept that the rendering of the US$ as worthless will lead to a real appreciation of gold is that you simply feel there is a greater fool.

The argument that the rendering of one asset that is inherently worthless will lead to everyone buying another asset that is worthless is an incredibly risky concept so you should put a high discount rate on it. The concept that gold is a good risk asset to hold is totally illogical when it is the very definition of no risk.

Personally I think that is an incredibly powerful argument against speculating in gold. But it does not mean that I can predict the price of gold simply I know why it is a bad speculation in my mind and clearly it is not a value play.

I believe that gold is inherently volatile because actually it is the very definition of risk and stupidity. An asset with absolutely certain fundamentals with an inherent value of zero is actually a play on a concept that it is a flight to quality when it is actually the ultimate speculative investment. You see Gregb is right it will always have an intrinsic value and a perceived value. Given the fundamentals are fixed and everyone knows that its intrinsic value should go up with a perceived increase in risk. Once gold acts as a risk asset it must be because the risk is tied to valuation against underlying value.

Gold is an incredibly interesting concept but you must admit you are playing with fire. You are playing with the absolute fixed fundamental value of something absolutely worthless which I agree has intrinsic value. But it's perceived price is based on the absolute certainty of its fundamentals and the absolute certainty that its inherent value is zero. So Gregb and Sokal should perhaps understand that their view that gold will go up when people realize that the US$ is worthless is an axiom rather than a theory that it will increase in relative to another asset. And fundamentally gold is inherently a risk asset because it is essentially worthless and totally dependent on that knowledge and absolutely fixed fundamentals.

And please accept that I am not making any argument about where the price will be nice week or next year. Given that everything is so fixed it is massively difficult to predict the price because you are trading a set of totally fixed fundamentals and totally fixed inherent values against everyone else.

And Sokal please realize that the theory of yours that gold defines cash on its fundamentals is a massively speculative investment on its price when it isnt actually cash. It is a very speculative investment because everyone knows the underlying fundamentals are so fixed and there is no yield. It is an investment of the perceived value of a guarantee of no value.

Edited July 27, 2010 by Abrak

[Abrak]

I think that is the rearview mirror here. Refusing to look forward at the inescapable reality of collapsing fiat currency. There must be a specific time in the future, or in the recent past, when converting to gold is the optimal strategy. It is our job to figure out when that is. The fact that gold has been climbing on average at over 15% for the past few years may indicate that the optimal time is already passed. There are few investments that generate greater than 15% in dividends.

So please understand that the 'inescapable reality of collapsing fiat currency' clearly means that it is a mathematical certainty that everything go up in price relative to the dollar. If you think that a mathematical certainty is a reasonable basis of investment you have to assume people are incredibly stupid. So you shouild conclude that the very certainty of everything and gold acting as a risk asset is not a reflection of the risk in fundamentals but value.

[Abrak]

BTW I do think that my very long post is a very clever argument in that it totally explains the underlying value of gold and its massive volatility against its fixed fundamentals which I have really found hard to come to grips with. So it may be a long post and cleverer investors may claim that they wonder why it has taken me so long to work this out but to the extent things are obvious to some they are not obvious to others.

[Abrak]

And please understand Sokal to the extent you value gold as cash I hope you realize that it is theoretically the most possibly conceivably over valued asset you can think of. I know 100% for certain that the inherent value of gold is nothing while you are thinking along the lines that gold will be worth more relative to cash because it is the very definition of cash. So to the extent you think its value and might be worth most when cash is worth least I know that with absolute certainty that actually gold is also worth nothing. And you cannot deny that fact because you are essentially peddling the perceived value of nothing so every single asset you own will be inherently more valuable than your perception that gold is actually worth something. To the extent that cash is worthless if it became worthless how much do you think gold will be worth. If you say it has value its theoretical value will still be low and you would finally accept that because if cash is worth zero while I sure it will be worth something you will admit that it is then inherently your most worthless asset.

If you wish to value nothing and you choose to consider it in that way given the risk free value of cash or gilts is fixed and you think that gold will outperform cash given the lack of return on gold I will 100% guarantee that as nothing is inherently defined by the underlying risk free rate of long term cash, gold which has a volatility and no returns and no use and no depletion and will be theoretically worth zero will be the most overvalued asset in the world at any value because you will be holding onto something that is inherently worth zero on the basis that it is worth more than the very concept you are comparing it with. And you should see that the risk free rate of return is essentially bonds say at 10 year interest rates. That is your starting point of the value of nothing. I guarantee you that the most worthless asset in the world other than fiat is gold in any sense of value because it has no yield, no use, no depletion, so you know that you are simply trading the value of nothing on the basis that it will go up because cash will go down.

The value of gold is simply your perceived at what you can sell a high risk asset that it is worth nothing against cash say over a ten year period at three percent that is the very definition of nothing as a starting point for a risk free asset. In essence the very argument is about the value of the second most useless asset being worth more than the most useless asset when the most useless asset is inherent worth slightly more than the second. A theory that that something that is inherently worth nothing being worth more than the risk free rate of cash over 10 years is an axiom to any investor and just because the value you believe that gold will outperform cash is a massively optimistic that it should go up against anything else because I know it is very risky and has no value and no return and to the extent that Sokal and gregb dont actually claim value in gold I will guarantee that every other investor 'claims' 'value' in their asset against cash. So I am investing against cash and you are speculating a very risky concept.

Now given that we are just trading assets to the extent you claim you can out perform cash with a very high volatility asset worth essentially nothing even outperforming cash might be optimistic and you are setting the bar very very low indeed and consistently lower. I know that to the extent that your value gold goes up against gold you are peddling perceived against actual value. What really do people apart from Sokal think that gold is worth apart in its perception relative to cash. And you think that your inherent belief that gold will perform against cash is an inherent reason that it should perform against other assets.

To the extent your value of gold is based on outperformance simply of gold against cash and that conclusion is not based on value you should understand that every other investment is by definition made on the basis of value. So you are punting essentially an incredibly risky and volatile concept of nothing - given the underlying fundamentals all you can predict is increasing volatility and the certainty that gold is ultimately the most highly geared play on the value of nothing. But given you are basically betting against the value of cash and say Flying genuinely believes there is an inherent value volatility of his nothing against the stockmarket of 40:1 he is speculating against the inherent value of nothing rather than inherent value.

Edited July 27, 2010 by Abrak

[SiamRose]

I know 100% for certain that the inherent value of gold is nothing

Its a pretty, shiny metal which can be made into jewelry. People enjoy wearing it and have done since the dawn of human civilization. It is also useful in electronics, dentistry, etc. The inherent, intrinsic value of gold is certainly not "nothing".

[lannarebirth]

I know 100% for certain that the inherent value of gold is nothing

Its a pretty, shiny metal which can be made into jewelry. People enjoy wearing it and have done since the dawn of human civilization. It is also useful in electronics, dentistry, etc. The inherent, intrinsic value of gold is certainly not "nothing".

It'll get you laid too, but then so will 500 Baht of fiat or a good story.

[sokal]

And please understand Sokal to the extent you value gold as cash I hope you realize that it is theoretically the most possibly conceivably over valued asset you can think of. I know 100% for certain that the inherent value of gold is nothing while you are thinking along the lines that gold will be worth more relative to cash because it is the very definition of cash. So to the extent you think its value and might be worth most when cash is worth least I know that with absolute certainty that actually gold is also worth nothing. And you cannot deny that fact because you are essentially peddling the perceived value of nothing so every single asset you own will be inherently more valuable than your perception that gold is actually worth something. To the extent that cash is worthless if it became worthless how much do you think gold will be worth. If you say it has value its theoretical value will still be low and you would finally accept that because if cash is worth zero while I sure it will be worth something you will admit that it is then inherently your most worthless asset.

If you wish to value nothing and you choose to consider it in that way given the risk free value of cash or gilts is fixed and you think that gold will outperform cash given the lack of return on gold I will 100% guarantee that as nothing is inherently defined by the underlying risk free rate of long term cash, gold which has a volatility and no returns and no use and no depletion and will be theoretically worth zero will be the most overvalued asset in the world at any value because you will be holding onto something that is inherently worth zero on the basis that it is worth more than the very concept you are comparing it with. And you should see that the risk free rate of return is essentially bonds say at 10 year interest rates. That is your starting point of the value of nothing. I guarantee you that the most worthless asset in the world other than fiat is gold in any sense of value because it has no yield, no use, no depletion, so you know that you are simply trading the value of nothing on the basis that it will go up because cash will go down.

The value of gold is simply your perceived at what you can sell a high risk asset that it is worth nothing against cash say over a ten year period at three percent that is the very definition of nothing as a starting point for a risk free asset. In essence the very argument is about the value of the second most useless asset being worth more than the most useless asset when the most useless asset is inherent worth slightly more than the second. A theory that that something that is inherently worth nothing being worth more than the risk free rate of cash over 10 years is an axiom to any investor and just because the value you believe that gold will outperform cash is a massively optimistic that it should go up against anything else because I know it is very risky and has no value and no return and to the extent that Sokal and gregb dont actually claim value in gold I will guarantee that every other investor 'claims' 'value' in their asset against cash. So I am investing against cash and you are speculating a very risky concept.

Now given that we are just trading assets to the extent you claim you can out perform cash with a very high volatility asset worth essentially nothing even outperforming cash might be optimistic and you are setting the bar very very low indeed and consistently lower. I know that to the extent that your value gold goes up against gold you are peddling perceived against actual value. What really do people apart from Sokal think that gold is worth apart in its perception relative to cash. And you think that your inherent belief that gold will perform against cash is an inherent reason that it should perform against other assets.

To the extent your value of gold is based on outperformance simply of gold against cash and that conclusion is not based on value you should understand that every other investment is by definition made on the basis of value. So you are punting essentially an incredibly risky and volatile concept of nothing - given the underlying fundamentals all you can predict is increasing volatility and the certainty that gold is ultimately the most highly geared play on the value of nothing. But given you are basically betting against the value of cash and say Flying genuinely believes there is an inherent value volatility of his nothing against the stockmarket of 40:1 he is speculating against the inherent value of nothing rather than inherent value.

Just because you don't agree that gold has value doesn't make you right. You are the minority, if gold had no value it would be worth 0 or at least be worth 0 at some point in history. A $1000 worth of cash bills in a box has the same yield as a 1 oz bar of gold sitting in a box. I can lend out my gold with interest no different then you can lend out your cash with interest.

If you look outside and see a 1 oz gold bar laying in front of your house, are you going to pick it up ?

[AnnyLing]

Gold can only go up up up.

Except when it goes sideways

or like in recent weeks down down down.

[flying]

Ok. Thanks for everyones replies. Flying will be pleased to know that I am no longer deeply conflicted because I know now exactly why in my own mind I will not own gold and exactly why in my own mind Flying should be deeply conflicted (and isnt.)

Sorry just got back from a trip....Did not read more of the book you posted just this 1st paragraph.......

Will just say glad your no longer conflicted & have it sorted in your mind but.... sorry you still have the need to decry others decision that is not identical to yours.

Back to where is gold going then?

Chok Dee !!

[cloudhopper]

It'll get you laid too, but then so will 500 Baht of fiat or a good story.

Sounds deflationary.

[cloudhopper]

Back to where is gold going then?

Chok Dee !!

Down it would appear.

That looks deflationary too.

[flying]

Back to where is gold going then?

Chok Dee !!

Down it would appear.

That looks deflationary too.

:D

Nothing goes straight up.

I remember the days of trying to breach 1k

He11 I remember trying to breach 800

[Abrak]

Just because you don't agree that gold has value doesn't make you right. You are the minority, if gold had no value,it would be worth 0 or at least be worth 0 at some point in history. A $1000 worth of cash bills in a box has the same yield as a 1 oz bar of gold sitting in a box. I can lend out my gold with interest no different then you can lend out your cash with interest.

If you look outside and see a 1 oz gold bar laying in front of your house, are you going to pick it up ?

Sokal I absolutely do not value gold at nothing. But you have to understand we are all just swapping assets here. If you see two different fundamental values of the risk free rate of 0 it is either gold or the US$ risk free rate of return which I would perfectly agree is very fair. Unless you are confident that gold will become the currency you have admit that your assumption that gold will go up based on the value of cash does not mean a real appreciation of the price of gold. Its guarantee and absolute appreciation. One 100% agree with people who argue that risk free rate of return in say the dollar significantly negative and if I priced everything off the value of gold being the risk free rate of zero, it does not lead me to buy gold at this point.

One of the points you should consider is what happens at the end of the day. Obvious gold will have gone up but everything will be worth absolutely more. And please understand this basing your returns on a -3% return on the risk free rate of the dollar that is defined as 100 and you believe will go to zero does not inherently lead you to buy an asset that is guaranteed in terms or actual yield to produce less. You are the only asset that in cashflow terms actually produces a return less than the dollar.

Clearly someone like me that sees no particular store in value in the US$ does not have any on that basis. I do have some as cash. If we are strictly talking value we have to consider the value of gold. It is based on the perceived value of nothing but nobody buys anything as a store of value of nothing (although you can clearly say they do). If you see gold and cash as the very different but inherent rate of nothing. Given the defined value of nothing is the risk free rate actual valuation of gold may or may not lead to you to buy it. It is the perception of the asset value of zero. Given that we both know that the absolute guaranteed return on gold is zero you have to admit on a fundamental basis we both know that the nominal value of cash is higher. This is important because we can both value assets on both same basis. And this creates an absolute certainty your certainty we both know that cash and gold are worth nothing is a view that cash is not an assumption of nothing while you think that my value of gold is nothing. If I want to invest in nothing gold is clearly better value in that it is absolutely guaranteed to generate no yields on better fixed fundamentals.

So if we actually both define the risk free rate in those terms your assumption is based my assumption that you think gold is better value as zero while they are both the definition of zero. To the extent we have perceived value you are basically making an assumption of a -3% on cash being the basis of zero and to the extent that I agree with you that your zero value is higher than the US$ -3% return I am just a bit worried that you think -3% is a value on concept as zero. If you think that essentially everyone buys all assets on the basis of the risk free return on zero which will be increasing seen as gold you should know that is a very risky concept.

Your problem is this. I value cash at -10% at the moment, so the very basis of the fact that we both agree that the value of the real value of zero will depreciate does not actually make gold a value play. If you at gold against the stockmarket its very volatility represents the very volatility of which is the perceived better value of zero, gold or cash. Please accept gold has a lot of value as an absolute value of zero against cash. And please admit that say the Dow Jones does not simply reflect its accounting value of US$ its reflects a bunch of assets. Gold is useless as cash (unless it becomes cash) because it reflects the most volatile of concepts.

Please accept that your knowledge that cash will be rendered worthless is not a guarantee that the price of gold will go up relative to other assets. The very volatility against a risk weighted basket of uncertain returns of equities. It is not highly volatile, the dollar to the extent we are swapping knowledge of our various assets an assumption that certainty that value of gold is based on the fact you think that gold will appreciate on zero returns while asset that is risk free and yields 3% will be lower. The whole point of a risk free asset is that it is the very definition of zero both gold and cash are. We can both assume this and no with certainty which I know means for a certainty you believe real value of zero is at least -3% is better value than cash as a value of zero.

Now actually I value cash as -10% so -3% does not look a better value investment of zero. But the actual value of zero is zero in relative asset terms. You can argue correctly that to the extent that people buy bonds on a risk free basis that is the absolute value of zero but you have to believe that I find it hard to see how long term bonds represent the value of zero and as zero cannot fall to the extent they are priced at that could imply they do. So clearly the real 'argument is a question of which is the best perceived inherent 'value of zero'.

Please accept we both define the absolute value of a risk free asset as zero and we both consider both cash and gold a risk free asset. As the US$ is currency, a unit of account, say the stockmarket or property will simply be an asset relative to that. If the US$ goes to zero we will simply redistribute assets on that basis. To the extent we both know with absolute cetertainty that one risk free rate is zero and the other risk free rate is above zero, I cannot predict the price of gold at all because if the perceived value goes from -3% to -5% then it might go up although fundamentally noone thinks the US$ is worth more than zero so the fact that gold will go up is an increasing view of the perception and if that is based on your perception that the US$ is rendered worthless you are the one that actually assumes that gold will go to zero which it clearly will not.

The very value in gold and price of gold is in the very concept that they are relative values of zero that are risk free. And they are both perceived as zero which makes the value of gold unknown and totally unpredictable. And therefore very volatile on a price basis. One concept to consider is that gold is very much an equity with a high discount rate. Its absolutely defined fundamentals against fiat are better and fixed but fiat does have use as cash. So theoretically the value is inherent and constant while the value against a bunch of equities is highly volatile. The value of gold against equities essentially represents different accounting of the same thing. But equities do have positive real cash flows against gold and cash.

Please understand that if gold goes to 5000 equities will not. So I personally believe gold represents the perceived value of zero given that gold is a less risky value of zero it is essentially seen as a more guaranteed value of zero which in value terms I agree with. Unfortunately they are both defined as zero, so the fact that there is no concept apart from the very fact they are the very definitions of zero at the point that people are most bearish on cash gold will be most overvalued. One thing I guarantee is that you cant base your underlying value on the concept that cash is worthless and will go to zero because we both inherently know they are the definitions of zero. As gold goes up it simply means the relative perception of the value between the two has increased. And as the risk free rate of cash is known the actual price of gold is totally unknown and I believe totally unpredictable and incredibly volatile.

Please understand that both are in some ways the very definition of zero. I will perfectly accept that the Chinese apparently see 30 year US$ bonds as a store of value and if that is the case then they are stupid as I see it. What you should realize is the absolute confidence in the fact that US$ bonds over 30 years is such a crazy investment that the assumption that it is the perceived rate of zero is silly. But I know it is a definition zero. The assumption some people have is that gold is simply worth more than fiat is an axiom because it clearly is.

So when I say that the concept of how zero will be perceived while you see the very definitions of risk free returns as gold with zero returns as better value than the perceived riskless rate of return of zero that is a funny argument because we both know that the ultimate value is zero and to the extent I think the value of cash is minus 10% it is reflected in my risk weightings which ultimately means that you simply perceive the perceived value of gold going up while the perceived value of nothing cannot be worth less than nothing. So the relative value of nothing is infinite. So we both know there is absolute know value argument against the price of gold and cash apart from it being two concepts of the risk free value of nothing.

In my view there is one very convincing are argument for gold against cash. As the relative value goes up the concept that the perceived value of one against the other goes up and becomes increasingly speculative. As it is concept the concept that both have an absolute value of zero the concept that something that has the same value is by definition increasingly speculative. Which means the peak of the relative bubble should be reflected in that speculation which means a very large rise on the speculation of nothing being the starting point of nothing.

By the way Gold inherently has to be worth more in terms of value than cash on the the basis that the an asset with a guaranteed no returns has to be worth more than zero. And risk free returns by whatever definition is a concept of the best value of zero but please understand that my biggest worry is that I value you cash at -10% while it is worth 0 but luckily my investments are based on that. If you argue that -3% means gold is better value than cash we agree but we would be discussing the value of the risk free rate of zero against a risk rate of zero.

[cloudhopper]

:D

Nothing goes straight up.

I remember the days of trying to breach 1k

He11 I remember trying to breach 800

I'm happy when my insurance premiums go down. And if there is never a claim in the end it doesn't matter too much since I own the insurance company.