A Little To Understand About Gold

Gold is either a crucial thig for everyone to own or it is an artifact that has no meaning. If you know too little, it could be either on a given day. I cannot claim to know enough, but I can claim that what I think I know I can support.

This paper from the Wharton School may help me add to my understanding. Knowing a little more abut anything can help you discover and exploit opportunities and to avoid catastrophes.

Gold’s Value As An Investment

The paper

I have not done more than scan the paper so far. Part of the reason is my intuition about N-State Markov Chains is a little rusty. There the usual Greek symbols lying on their side to further delay my understanding. Eventually I looked at the pictures while claiming to read the article.

The Introduction is written in language I understand and it talks about things I can assess.

“Because gold is used as an investment asset, it is believed to be worth more than its fundamental value as jewelry or as productive input.”

“Gold is attractive as a store of value in times of low and negative real interest rates.”

“When interest rates go up again, the price of gold declines again.”

“Even in times when investors are not holding gold, the prospect that they could enter the market bids up
the valuation for those who use it as jewelry or a conductor”

“gold can be viewed as a substitute for real bonds and like such bonds, its value moves with real interest rates”

” However, gold also has option value. Because of gold’s potentially long duration, this option value could be very high”

The rest of the introduction talks about how the author analyzed these points. I have not decided I want to wade through that to get the “proof” for the ideas.

For now suffice it to say, gold is a complex asset whose price as with all marketable investments has two possible price presentations.

  1. What it is truly worth to someone who wants to own it for use, the floor price the author talks about.
  2. The price the market assigns which is based on other factors that are difficult to assess individually, and certainly difficult as they interact with each other.

I do think with an asset like gold, the more you can attach your understanding of it measurable things, the more likely you will be able to see opportunities.

The bits to takeaway

There are few situations where gold will be your financial salvation. A the same time, notice that few situations and no situations are not the same thing. It is therefore closer to insurance than a financial investment. As with any insurance the question of how much to own becomes important. That relates to your personal situation and you should look at it in that way.

Gold is not a classic investment in the sense of having a fundamental value that dominates.

There are traders who can win by buying and selling at what in retrospect appear to be obvious points. In prospect such points are very difficult to see.

Be cautious. Gold is fun to talk about, but as an investment hard to assess.

Help me please. If you have found this useful, please subscribe and forward it to others.

I build strategic, fact-based estate and income plans. The plans identify alternate ways and alternate timing to achieve both spending and estate distribution goals. In the past I have been a planner with a large insurance, employee benefits, and investment agency, a partner in a large international public accounting firm, CEO of a software start-up, a partner in an energy management system importer, and briefly in the restaurant business. I have appeared on more than 100 television shows on financial planning, have presented to organizations as varied as the Canadian Bar Association, The Ontario Institute of Chartered Accountants, The Ontario Ministry of Agriculture and Food, and Banks – from CIBC to the Business Development Bank.

Be in touch at 705-927-4770 or by email to don@moneyfyi.com

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