I don't quite understand gold

[disneysteve]

I was reading an article this morning in Smart Money about how more and more folks are turning to investing in gold. Sales of gold coins has skyrocketed to the point that the mint can't keep up with orders.

What I don't understand is why?

Gold has no inherent value. It is only worth what others are willing to pay for it. It serves no practical purpose. Sure, you can make jewelry out of it, but that won't put food on the table in a crisis. If we started seeing significant inflation, why would gold become more valuable?

Help me understand the whole gold thing because right now I just don't get it.

[m3racer]

Gold has always retained a stable value. It is gold that backs the money that we print. You can't just make gold off the press. A colleague of mine just changed half of his portfolio to gold once he heard our moronic treasury printed 1 trillion dollars 2 weeks ago. Hello inflation.

[poundwise]

Actually gold is quite valuable in many electronic, medical, and safety devices.

However, the rush to buy gold in the current environment is fueled by panic and uncertainty more than common sense. To illustrate: One of the ads promoting the purchase of gold says, "Gold is at an all-time high." So... buy? It is generally not a good plan to buy something when it is essentially being touted as being as costly to obtain as it has ever been.

Frankly, the only dealings I'd consider with gold, at the present time, is if I had some to sell.

[GREENBACK]

It's always been touted as a hedge against inflation and I've never quite understood the argument either. I would personally rather just have cold hard cash. I say this with relatively little investing knowledge so I'd love to see an explanation as well.

It's a wonderful precious metal but so what! Does the long term value of owning it ever even exceed cash in a long term bond or CD.

I once heard that a cubic inch of gold could be stretched for a mile if properly annealed and heated to the right temp.. That's about the most interesting gold info. I've ever heard. Not sure if that increases the value of your stack but might be good cocktail talk.

[boosami]

Gold has always retained a stable value. It is gold that backs the money that we print. You can't just make gold off the press. A colleague of mine just changed half of his portfolio to gold once he heard our moronic treasury printed 1 trillion dollars 2 weeks ago. Hello inflation.

The US dollar has not been backed by gold or silver since WWII. It is not backed by anything. If it were backed by gold, your friend would not have to change his portfolio.

[m3racer]

If it were backed by gold, your friend would not have to change his portfolio.

I disagree. When inflation hits than there will be more paper money in circulation. The amount of gold does not change. The last time I checked the government controls a very large stock pile of gold. Now why would the government hold onto such as asset if the US dollar was not backed by a certain degree to gold?

[disneysteve]

The US dollar has not been backed by gold or silver since WWII. It is not backed by anything.

Actually, it was 1933 when you could no longer bring cash to the bank and exchange it for gold. And it was 1971 when the government stopped "pegging the value of the US dollar to a fixed amount of gold." The quote is from the article.

You are correct that the US dollar is not backed by anything. m3racer, just because the government has a stash of gold doesn't mean that has anything to do with the value of a dollar bill.

[Scanner]

First it was the tech. bubble.

Then the housing bubble.

Then the credit bubble.

The US dollar will be the last bubble to burst. It's slowly inflating right now. It's only a matter of time.

Okay, it doesn't have to be gold per se. . .but I would own some commodity, something with intrinsic value - silver, oil, copper. . .something besides paper things - stocks, bonds, and cash.

[Scanner]

Let's put this another way:

Pick a Blue Chip - let's say Disney. What's the downside risk of buying a share of Disney today?

Compare that with gold - what's the downside risk of buying an ounce of gold today?

[disneysteve]

Let's put this another way:

Pick a Blue Chip - let's say Disney. What's the downside risk of buying a share of Disney today?

Compare that with gold - what's the downside risk of buying an ounce of gold today?

That's what I don't get. Disney is an international company with tens of thousands of employees. In Florida alone, they own nearly 30,000 acres of land. They own millions of dollars worth of buildings, equipment, computers, vehicles, etc. They own TV and radio stations and movie studios and all that goes with it. All of that stuff has value. If their business suddenly dried up all at once, they could at least sell off all of their property and other holdings and split up the cash amongst the owners (shareholders) of the company.

Compare that to gold. What exactly can I do with a gold coin? I can't buy groceries with it. I can't pay my mortgage with it. Not unless I can get someone else to give me cash for it first. If inflation was rampant, would someone want to give me what cash they had in exchange for my gold coin? They would then be left with a coin that they couldn't do anything with unless they found another person to give them cash for it.

What am I missing here?

[Scanner]

First of all, let's say Disney goes under. All those assets you mention, from the acreage of land, the computers, the big giant golf ball that they scrap aluminum for. . .it goes generally to pay out bondholders first, stockholders last. Bondholders may be general bondholders or pension funds for employees and so forth.

So, you own some of that while they are operating as a stockholder but truth is, if they go out of business, your share of stock will be worth about $.01.

In all essence, stockholders are never paid.

Now. . .do you think gold will ever be worth $0.00? No, it will always be worth something. Gold can't ever be worth nothing. The question always is. . .where it is trading at. . .how low can you think it go and how long would it stay there?

I think there is some downside risk on gold right now and probably, right now, the downside risk on gold is probably more than blue chips right now, mainly because of market risk.

You know I prefer silver because it does have utilitarian value as well as precious value but that's the idea behind owning a commodity itself.

Interesting, during the recent bubble collape, mining companies (stocks - some lost as much as 90%) got hammered with the commodity itself got hammered but then recovered.

[GREENBACK]

It should be mentioned that buying gold is a little different from buying gold stock. I can see buying into the mining and processing part of it but even that isn't neccesarily something I would go whole hog on. I have to wonder if buying gold because the dollar value is based around it is not the best idea. I would like to know why many knowledgeble people do this. Is it just a good place to hold money temporarily if you're an active trader? If you're not this type, should you stay away completely?

[financialnut]

I suppose there's a market for gold anywhere. Assuming the US economy completely blew up, you could probably find an international buyer that would give you something for your gold and probably NOTHING for your dollars because they may not carry any value at that point.

[m3racer]

Actually, it was 1933 when you could no longer bring cash to the bank and exchange it for gold. And it was 1971 when the government stopped "pegging the value of the US dollar to a fixed amount of gold." The quote is from the article.

You are correct that the US dollar is not backed by anything. m3racer, just because the government has a stash of gold doesn't mean that has anything to do with the value of a dollar bill.

Krap!!!! I'm moving to Morocco.

[blankcheck]

First it was the tech. bubble.

Then the housing bubble.

Then the credit bubble.

The US dollar will be the last bubble to burst. It's slowly inflating right now. It's only a matter of time.

Okay, it doesn't have to be gold per se. . .but I would own some commodity, something with intrinsic value - silver, oil, copper. . .something besides paper things - stocks, bonds, and cash.

There's something apocalyptic about this thinking, but I can't quite put my finger on it.

If we have a substitute for the value of items, rather than the direct bartering of items themselves, then any economy can have an inflation or deflation of it's currency. That doesn't mean the currency HAS to be backed. It's actually super convenient if the precious metal is worth exactly what it's weight of a coin is, because we could eliminate the paper middle man.

But I don't know how comfortable people would be nowadays, carrying bags of gold and silver around to do their regular shopping, or paying their mortgages.

The system is too unweildly and outdated for the commodity itself to gain a certain value, unless we find out someway that gold cures AIDS or something.