Jump to content
Objectivism Online Forum

Understanding the Objective Value of Gold

Rate this topic


Epistemological Engineer

Recommended Posts

Thanks. Here are two of my premises, which I lay out for checking:

1) The only alternative I've set up for myself is cash

2) Gold and silver are going to do better than cash in the long run, and even in the moderately-short run. (Why wouldn't they? dot dot dot) Thus even if we're in a bubble and, say, yesterday's sharp decline continues, I can just wait until their perceived value relative to the USD bounces back.

Why is your only alternative cash? It's a good idea to keep 3-6 months of cash in a savings account to handle emergency expenses (car breaks down, illness, job loss, etc.) However, each dollar you keep in cash has an opportunity cost. You might find it difficult to exhange gold and silver at present, even coins, as cash. I understand all to well how frustrating it is to see your cash eroding in value everyday by an inflationary monetary policy.

Consider the merits of owning equities instead of commodities like gold, silver, & oil. It is true that owning commodities can offer you a hedge against inflation. As each dollar becomes worth less it takes more of them to buy the same quantity of commodity but from a wealth standpoint you aren't any better off than when you started. It is true that these commodities can genuinely increase in value as they are production inputs for other products, but seperating those price changes from purely inflationary price changes is nearly impossible from a practical standpoint. On the other hand, if you own shares of a business making inflationary determinations is not necessary because, genreally speaking, businesses are able to raise prices in response to inflation. This is why stocks have outperformed all other asset classes on average over time.

Link to comment
Share on other sites

As each dollar becomes worth less it takes more of them to buy the same quantity of commodity but from a wealth standpoint you aren't any better off than when you started.

But I won't be worse off--and that's my starting point. Again, as I said earlier, my primary reason for taking this first step, from cash to metal commodities, is wealth protection given the standard nonoptimistic view on the world economic situation.

On the other hand, if you own shares of a business making inflationary determinations is not necessary because, genreally speaking, businesses are able to raise prices in response to inflation. This is why stocks have outperformed all other asset classes on average over time.

Again, one of my assumptions is that I'm keeping things simple; understanding the value of a business or the performance of a stock would take me into territory much more complex than that of a simple commodity. So let me ask you a few questions for clarification of your position:

1) In which businesses or stocks do you invest?

2) How do you research and track these companies? Do you read their monthly cashflow statements and their CEOs' letters to shareholders?

Link to comment
Share on other sites

But I won't be worse off--and that's my starting point. Again, as I said earlier, my primary reason for taking this first step, from cash to metal commodities, is wealth protection given the standard nonoptimistic view on the world economic situation.

Again, one of my assumptions is that I'm keeping things simple; understanding the value of a business or the performance of a stock would take me into territory much more complex than that of a simple commodity. So let me ask you a few questions for clarification of your position:

1) In which businesses or stocks do you invest?

2) How do you research and track these companies? Do you read their monthly cashflow statements and their CEOs' letters to shareholders?

All investments carry with them an inherent risk of loss in value. If the price of gold declined from its current levels, you would be worse off. I commend you for shying away from investments you don't understand, but don't be lulled into thinking that commodities are simple. The factors affecting commodity prices are every bit as sophisticated as those effecting a large business. Beware of getting caught up emotional investing driven by irrational exuburence or excessive pessimism. It often pays to be greedy when others are fearful, and fearful when others are greedy. Benjamin Graham's Mr. Market analogy did a great job of explaining this.

1) If you want to take a more passive approach to investing check out Vanguard's Index funds. Berkshire Hathaway (Warren Buffett's company) is also great to own.

2) If you want to get serious about research. The first step would be to learn how to read and interpret all four financial statements. Focus first on learning to read the Balance Sheet & Income Statement. All publically traded companies are required to file quarterly financial statements with the SEC. You can look them up here: http://www.sec.gov/edgar.shtml

Pay close attention to fees you pay to own any investment. Include transaction fees, commissions, storage costs (for gold/silver). Make sure to include them when calculating return on investment.

Edited by Mixon
Link to comment
Share on other sites

Join the conversation

You can post now and register later. If you have an account, sign in now to post with your account.

Guest
Reply to this topic...

×   Pasted as rich text.   Paste as plain text instead

  Only 75 emoji are allowed.

×   Your link has been automatically embedded.   Display as a link instead

×   Your previous content has been restored.   Clear editor

×   You cannot paste images directly. Upload or insert images from URL.

Loading...
  • Recently Browsing   0 members

    • No registered users viewing this page.
×
×
  • Create New...