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Driving down the road today and I see what looks like a hot dog cart. I'll come back to that.

I'm rambling here so bear with me.

A while back I was watching antiques roadshow. A woman had a cigarette case that her grandmother received as payment for a dinner during the Depression. A once successful individual, now living on the road, had no cash and only that case. Her grandmother took the trade for the meal. Upon examination by the road show team, it was Fabergé and made of 18 karat gold, yet at that mopment in time was only worth the price of a meal.


So what is value?

Back to the hot dog cart. The sign explained it was actually selling lobsters. For nine dollars you received a 1 pound lobster corn and potato. What a sign of the times.

I was in the grocery store the other day and noticed that in the fish display precooked lobsters 1 to 1 1/8 pounds were $5.99.

Lobsters, discounted to the price of cod. Sold on street corners as a meal for under $10.

Who decides what it is worth. Who sets the value. Who makes up the exchange. Do we just fool ourselves into believing that gold is a hedge copper is a hedge, when in reality it is the can the Spam that will control the purchasing power's and directions of the world in the future. If there is nobody capable of buying the gold or paying high prices for lobster, then how can anything but the most basic essentials be considered a hedge?

Like the man with the cigarette case during the Depression, this trinket which once must have commanded a premium price was now worth no more than the value of a paupers supper as no one had the money to buy the case.

As we watch the price of commodities, gold, and other items considered to be of value, rise in reaction to the fall of the dollar, a fall in the value of real estate, are we not just kidding ourselves? The investment into these items is based on optimism. Optimism that things will recover, that the recovery will be timely, and that there will be demand for those products when the recovery happens.

Kind of risky don't you think.

We have wishfully watched as our government claimed it was buying up toxic assets. Didn't make them go away. They are still out there, momentarily supported by some bond that was issued that is again being backed by something with no value.

We watch Dubai, and tell ourselves how small the amount is. We shrug our shoulders, not recognizing the cascade of dominoes that could begin falling when no coverage is provided to these loans.

I wonder if someone keeps a price of gold versus price of lobster chart somewhere. It may aid us in getting it clearer understanding of the mess we may be approaching. Take that gold lobster chart and begin to plot it against a canned Spam a chart, and we may be seeing into the future. We will be carrying our doubloons of gold, our 18k cigarette cases and our Rolex watches to the window in hopes of exchanging them for a Spam dinner.

We had seen this happen before.

Just rambling

Bears

Home Fool
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Value appears to be what humans minds collectively say something shoould be valued at....It is a negotiation between minds. I say it is is one thing....you say it is the other.....Ok, to be agree-able let's just split the difference in this place and time because tomorrow we might both feel differently and then we would have to negotiate all over again.....

Which is why I get amused when people get extremely specific on what the price of something might be.....the collective human minds just might never agree to whatever mathmatical formula that says something should be this or that value.

Mathematical formulas used by the wise appear to me to not be too overly precise but are instead really not too much more than odds making tools. I have approx 60% odds that maybe the "market" will value something the same way I am valuing it and I might decide to take that bet knowing my results might come in much worse than I expect or much higher than I expect.....that is all these mumbo-jumbo voodoo wizards are doing with DCF....reading tea leaves just like everybody else....If we sell the method and more people use it like us then we have a "STANDARD" way to value things....WE have RULES.....

....which is sort of why I like going to Indonesia shopping sometimes...In the USA, we have RULES...the price is posted and you must pay the posted price otherwise it breaks the rules....all pricing according to our rules is previously negotiated for you...making things convenient....Well in Indo...it ain't like that. Even sometimes in the big malls, you can negotiate prices....everything negotiated on the spot.....Rulebreaker in my heart I remain and I throw conventional rules in the garbage can :) which why i intentionally butcher the english language often mispel and Don't use "PROPER" english syntax or is it SIN - TAX???


Starrob
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If there is nobody capable of buying the gold or paying high prices for lobster, then how can anything but the most basic essentials be considered a hedge?


If you look at the history of countries where there was a currency collapse the economy switches over very fast to silver and gold trading. Specifically, when Argentina's currency defaulted, gold rings were the preferred method of currency. It's not necessarily whether someone can "afford" the gold, but will they accept it.

Since the U.S. dollar is the world's reserve currency still, the risk of the above scenario is virtually zero. But if you lived in a 3rd world country, your gold would have value no matter where you go.

Also consider this. 5 years worth of SPAM would occupy a pretty large area spatially. If you were forced to relocate there would be no easy way to transport the food. But you could carry in your pocket enough gold to buy 5 years of spam easily.
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I like SPAM and lobster. Don't understand gold, but long FCX for now. I wish I were not in Saigon, because lobster is so cheap in the US.

Just a short rambling.

I look out of the window, I think the sky is more blue than grey.

George
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Right on Bears

My dad taught me this lesson a long time ago. A baseball card (or any asset) is only worth what someone else is willing to pay for it. A gold is only worth $1100 (or whatever it is right now) if someone will pay you that for it. In the video below, some blowhard is trying to point out how stupid Americans are because they won't buy his 1oz gold coin from him for $50.

Nevermind the fact that I'd be skeptical of some random dude on the street trying to pawn a "gold" coin off on me, but he completely misses the point that he can't even get someone to buy him Starbucks for the coin. So what is it actually worth?

You don't have to watch the whole thing, just the first minute or two to get the gist.

http://www.youtube.com/watch?v=Gk5aRIz17fk&feature=PlayL...
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I say: This points out the importance of a trustworthy counterparty. (That is, would you buy a used gold coin from this man?)

Richard
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Nevermind the fact that I'd be skeptical of some random dude on the street trying to pawn a "gold" coin off on me, but he completely misses the point that he can't even get someone to buy him Starbucks for the coin. So what is it actually worth?


Considering any jewelry store, coin shop, or pawn shop would give you near spot price for the coin, it shows how dumb (or atleast finanically unaware) the people he are interviewing are.

I don't get you guys who think gold is only worth $1,100 because of pyschology. For the past 5,000 years gold has been used as a currency. The dollar has been used for roughly 200 years, the Euro 10 years, yet I kept seeing a lot of people on these boards who keep implying they would rather have fiat currency and a sloppy loose monetary policy rather than gold. Doesn't make logical sense.

To compare baseball cards to gold is ridiculous. When have baseball cards been used as the reserve currency?

Here's another one of his videos to try and get people to sign a petition to increase inflation to 100% lol

http://www.youtube.com/watch?v=vJtS9CuyuaU&feature=playe...
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That is, would you buy a used gold coin from this man?

Why does it matter if it is "used" or not? Obviously it is a bullion coin, where the condition of the coin is virtually irrelevant. I'd be more concerned that it is real gold. However, coins from a mint are hard to counterfit.

The coin has to be fake over 21/22 times for it to be a bad deal.
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I would add that part of golds 'function' as a currency is based on its relatively simply identification and ease of verification. Easier to pass something like nickel off as silver than to 'fake' gold. Speaks to the fungibility of gold, which again is part of why it trades as a currency rather than a commodity.

I'd have asked the guy if I could verify the coin, otherwise I would be prone to distrust him as well. It is pretty basic psychology that one would be prone to distrust a 'too good to be true' deal. I would expect he'd have far more takers if he was selling the coin for say 'just' $750.

TMFHelical
Home Coverage Fool
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<<I don't get you guys who think gold is only worth $1,100 because of pyschology...yet I kept seeing a lot of people on these boards who keep implying they would rather have fiat currency and a sloppy loose monetary policy rather than gold.>>

What gives gold its value if not human perception/psychology? It can't be eaten, it provides little warmth, and it is impractical for building shelter. There are few industrial uses for gold and all can substitute another metal (similar to the switch from gold fillings by dentists the last time gold skyrocketed).

The only reason gold holds value is because someone else thinks it holds value. Just like fiat currency. The dollar only has value because someone believes the US government will honor a debt paid with it.

I don't like to refer to Buffett to make arguments, but he isn't wrong when he says capital is spent to dig gold out of the ground so that it can be processed, (generally) shaped, and packed away in a safe or vault. Unlike limited resources like oil, timber, and food, it is never used, it is just hoarded. The rarity that supposedly gives gold its value is a human construct. Just like fiat currency.
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The only reason gold holds value is because someone else thinks it holds value. Just like fiat currency. The dollar only has value because someone believes the US government will honor a debt paid with it.


I agree with this. When you were speaking of gold before, I thought you meant that as a currency it is a poor choice. Right now, I would be questioning the value of the dollar way before considering gold worthless.

Curious though, do you have a argument against gold being used a currency for 5,000 years? Nothing else, not any other commodity, has held it's value as long. Gold from the Roman era, is still gold.
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"don't get you guys who think gold is only worth $1,100 because of pyschology. For the past 5,000 years gold has been used as a currency. The dollar has been used for roughly 200 years, the Euro 10 years, yet I kept seeing a lot of people on these boards who keep implying they would rather have fiat currency and a sloppy loose monetary policy rather than gold. Doesn't make logical sense.


My post beginning this thread covered that. The once wealthy depression era man trading the cigarette case for a meal, and 75 years later upon first review as an antique is identified as 18K gold.

You can have all the gold you can carry, but if you meet up with a guy with a can of Spam, you are hungry and there is no place or nobody to exchange gold with .... your gold is worth a can of spam.





The people that sell gold hate it when people remember the 70's. Most don't.

During that decade (70's) , the price of gold increased by a factor of 24 times, peaking at $850 per troy ounce in 1980.

Then crashed, losing 65% of its value in two years.

As late as 2000 that once $850 gold was trading at $272.00

Those who bought in 1980 had to hold for something like 27 years to recover their original investment after it fell.

So, it again has recovered and set new levels .... but not because it is worth more, its all based on the dollar fluctuation. If the dollar strengthens (which with Dubai, Greece and Spain failing, it may much sooner than later) Gold will hit the crapper again.


Bears


Home fool
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"Curious though, do you have a argument against gold being used a currency for 5,000 years? Nothing else, not any other commodity, has held it's value as long. Gold from the Roman era, is still gold."


Your mind is assigning a value to Gold. You seem to personally favor gold as a currency. There are some minds that might not favor gold as a currency.....some other minds are nuetral to gold as a currency and all of these opinions change as a function of time and are negotiated in many different places.

There is a market place that assigns gold a value of $1000 or so dollars. I am also sure I can find different places in the world that would assign Gold a value of zero. There are some places in this world where water is scarce and water is a commodity that is highly valued....in such societies both Gold and US Dollars might be worthless. How things are valued appear to me to be functions of time, place and negotiation skills on the part of the negotiator.


Starrob
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Your mind is assigning a value to Gold. You seem to personally favor gold as a currency. There are some minds that might not favor gold as a currency.....some other minds are nuetral to gold as a currency and all of these opinions change as a function of time and are negotiated in many different places.


It's not just my mind assigning value to gold though... hundreds of generations have determined that gold has value. 5,000 years is a big enough sample size to say it is not a fad. Every human civilization has used gold as a currency at one point. The Romans, the Greeks, the Europeans, the Americans, have all used Gold as a currency.

Let's look at more modern time though. A lot of people on here are extremely bullish on India and China. India which bought 200 tonnes of gold from the IMF last month. China which is the biggest miner of Gold in the world. China has been adding gold to their reserves rapidly also. Two of the countries which these boards are most bullish about are absolutely hoarding gold right now... should be an obvious sign in my opinion.

I am also sure I can find different places in the world that would assign Gold a value of zero.

You could fill in the word Gold there with anything at all. Obviously you would need to take it to the correct market place.

...

I guess I'm just surprised that I haven't ever seen a single post on the Fool forums that even suggests holding a small amount of gold could be a good investment.

I've seen posts touting stocks, cash, real estate, the BRIC's, oil, almost all the other commodities as great investments. Yet everyone on these boards have a bearish view of gold no matter what price it is. If it was at $50 right now or some all time low, seems like I would still be hearing it's all in my head... I don't get it.
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"It's not just my mind assigning value to gold though... hundreds of generations have determined that gold has value. "


I once posted a history of money on here that I think virtually no one read or commented on.....How I view this is large groups of people at various times and locations have assigned values to gold from zero to almost any value that you can name.

Anything can serve as a currency and just because something has served as a currency in the past does not mean that it will always be considered a high value currency by various groups of people at different points of time in the future.

There is no ABSOLUTE RULE in the universe that says that gold must be a universal currency......well...maybe some people have that as a rule but it is not my rule for I am not a Absolut-ist drunk on my own wisdom....I am more a relativist and just for today I say wood sticks have more value than Gold to me.....on other days it might be platinum, Molybdenum or oil.

Some might say that am a damn fool for feeling that way but if I have something you want badly and all you have to offer is gold well then you will have to negotiate with me and maybe not get the exact price that you want. Just about everything is negotiable to me....

You see I have even read things that have said in the event of a economic collapse that Silver is better to own:

http://www.americansilver.us/


So not ALL are gold bugs and the price is always negotiable.

Why Gold and not Silver???? Well, Silver has disadvantages but it also has advantages over gold too......Different Silver bugs can enumerate those advantages over gold if you care to look at something that directly contradicts your point of view.

I am the type that always contradicts my point of view because I learn more. It makes me tend not to be a big bible thumper on many subjects. I will only thump my bible when others insists that they have the view that should rule ALL. Views that rule all is about control which is why Nixon confiscated the nations Gold:

http://en.wikipedia.org/wiki/Executive_Order_6102

I can get deeper into this but I got to go....I only paid for one hour internet...I am right now in Paris France....I should b home Thursday evening




Starrob
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Let's look at more modern time though. A lot of people on here are extremely bullish on India and China. India which bought 200 tonnes of gold from the IMF last month. China which is the biggest miner of Gold in the world. China has been adding gold to their reserves rapidly also. Two of the countries which these boards are most bullish about are absolutely hoarding gold right now... should be an obvious sign in my opinion.


China holds a relatively low amount of gold in comparison to most countries. China's gold reserve only accounts for 1.3pc of total reserves.

To put that into perspective, China holds an estimated gold reserve of 600 tonnes. The US holds around 8,500 tonnes,

Unstable pricing? When the US unemployment numbers showed a slight improvement, the price of Gold dropped 7%.

Picture the government or individual who has horded gold here at the top. Any improvement in the value of the dollar could easily clip the price by 1/3 since it has no hard value, only spec value. Consider that many investors and hedge funds are sitting on 30% gains at this moment. The caution of any dollar improvement will cause a flooding of the market and a crash in price. Risky position.

One main problem is that you cant use up gold. Soy beans can have a bad crop and people must eat, depleting the supply of soy beans and increasing the price .... logical sequence. Gold ... they keep digging it, once it enters the market, most remains. The only losses would be the small amount used in electronics that may not be later recycled. The rest will be made into stuff which under demand can be melted down to replenish base supply. Creates volitility and potential huge swings.

Bears

Home Fool
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China holds a relatively low amount of gold in comparison to most countries. China's gold reserve only accounts for 1.3pc of total reserves.


I think that is correct, but there is a lot of evidence suggesting that is changing right now basically. Here is some article from December 1, saying they are ramping up fast, to protect from dollar losses.

http://www.chinapost.com.tw/business/asia/b-china/2009/12/01...

BEIJING -- China should increase the amount of gold it holds in reserves to reduce potential losses from a depreciating dollar, the China Youth Daily said today, citing Ji Xiaonan, head of the supervisory committee at the state-owned Assets Supervision and Administration Commission.

“We recommend China increase its gold reserves to 6,000 metric tons within three-to-five years and possibly to 10,000 tons in eight to 10 years,” the paper quoted Ji as saying. China increased its gold reserves by 76 percent to 1,054 tons since 2003 , the official Xinhua News Agency reported in April.

China is likely to become the world's largest producer and consumer of gold this year, Rozanna Wozniak, investment research manager at the World Gold Council, said yesterday. The dollar has fallen about 20 percent against the euro since Feb. 18. Dubai World's possible default may give China an opportunity to invest its foreign currency reserves in the metal and oil, Ji said in a separate report by the Economic Information Daily.

“Given the size of their reserves compared with the size of the gold market, there's a limit on how much they can add,” David Barclay, commodity strategist with Standard Chartered Bank in Hong Kong, said today. “But it certainly seems that there's scope for further addition.”

Ji said that the recommendation to buy gold was made by an unidentified group of experts who had convened since last year to discuss the issue, the Youth Daily reported.
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Good discussion though, always nice to see the opposing viewpoint.
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I think the media plays a part in the dollar psychology.

Yes, the economy is going to hell in a hand basket, but that is not what sets the price of the dollar. It is security vs other currency

Lets look at the actual Dolar vs Euro exchange rates to date

USD per Euro

Jan 2004 $1.26

Jan 2005 $1.35

Jan 2006 $1.87

Jan 2007 $1.32

Jan 2008 $1.46

Jan 2009 $1.39.7

Dec 2009 $1.47


What am I missing?


Bears

Home Fool

Dec 2009 $1.475
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With regards to China, I was going to say the yuan is directly linked to the dollar. But it looks like in 2005, the fixed exchange with the dollar was dropped.

They now have some new policy: "The daily trading price of the U.S. dollar against the RMB in the inter-bank foreign exchange market would be allowed to float within a narrow band of 0.3% around the central parity published by the People's Bank of China (PBC); in a later announcement published on 18 May 2007, the band was extended to 0.5%"

Either way, the yuan has a very close correlation with the dollar, so it would probably be more accurate to say they are looking to diversify away from the dollar, rather than protect against dollar losses.

The Chinese don't like that their fate is tied to our monetary policy. It's a strange paradox where the more gold they accumulate the less their other assets are worth. There is a lot of chatter on precious metal forums that China is secretly building up their gold supply, so that they can have a surplus before a big runup occurs.
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What am I missing?

Correct data? Jan 2006 was more like $1.20.

At some point in the past decade it was $0.70 or so. Between $0.70 and $1.50 there's some room for irrationality.

If you'd ask me I'd say we'll see parity again, maybe somewhere in the next decade.

Mark
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Correct data? Jan 2006 was more like $1.20.


Works for me, I could not understand that amount for that year.

Points out that the range on the exchange rates is not that extrema, as in "the falling dollar"


Bears


Home Fool
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Points out that the range on the exchange rates is not that extrema, as in "the falling dollar"

I think from $0.70 to $1.50 is a pretty steep fall, even if it's in a decade. Double-digit changes have bigger implications when happening to a currency like the USD than say a random small-cap or mid-cap company.

Mark
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