The Value of Gold

A child of Zeus, neither moth, or rust devoureth it, but the mind of man is devoured by this supreme possession.
                                Pindar, 5th century BC Greek poet, describing gold.
 

After two decades of nearly continuous appreciation, the price of gold topped in August of 2011 at 1889.7 an ounce and have since retreated to the 1600 per ounce level. However, interest in the shining yellow remain high. Tuesday, on CNBC's "Future Now" program, RBC precious metal strategist spoke of the misconceptions of gold.

Gold is one of the most widely held financial assets - but that doesn't mean everyone understands the catalysts that drive gold higher or lower. On Tuesday's "Futures Now," RBC Precious Metals Strategist George Gero set out to clear two of the biggest misconceptions people have about gold.

Misconception One: If Gold Falls for a While, That Gives You a Good Chance to Buy It

This one sounds pretty obvious. Gold is worth a given amount, so if people keep selling it, than it will fall to a level at which it's a good value - right?

Well, not exactly. As Gero explains, "Asset managers look for performance - and performance has not been with gold." This explains why the major stock market rally has presented a serious headwind for gold. As stocks have seriously outperformed bullion, managers moved their money out of bullion and into what was working.  

That's why trends in the gold market can be far more important than any sense of inherent value - meaning that, paradoxically, falling gold prices are bad news for people who are looking to buy in.

Whatever merits or lack there of are in what the "expert" had to say, is not the object of this post. However, the assertion that professional asset managers who try to profit from changes in the value of gold had nothing better to go on other than the price of gold itself speaks loudly to the nature of the value of gold. Financial assets derive their value from actual and potential cash flow. Holding gold generates none. In this sense, gold doesn't even qualify as a financial asset. Gold is a good, much like food and shelter which derive their value from utilities. Gold serves primarily two functions, one as adornment and the other as media of exchange or money.

Gold is used as jewelry. The reasons are of course self evident. However, gold also serves its other purpose better than any material in the world. Gold is found on every continent, yet rare enough and hard enough to dislodge from the rocks that surround it to be valuable. Gold is inert, malleable and infinitely divisible. Other materials have been used as money throughout history, but none more universally recognized and successful as gold. So in gold, not only lies the perfect attributes of money, but also the brand equity of universal acknowledgement.

On this earth, there are two universal currencies, gold and the US dollar. Gold priced in US dollar has been stalled because the US dollar has been strengthening against other major earthly currencies such as the Euro and the Japanese Yen.