Thinking About Thinking

The Case For Gold & The Case Against Gold

Posted in Economy, Pop Culture by larrycheng on November 19, 2009

I’ve been looking unsuccessfully for an article that succinctly lays out both sides of the debate on whether gold is a good asset to own.  So, I’m here to ask for your assistance in pulling together an article that outlines the key points on both sides of the debate.  I have some ideas, but I’m sure you have more.  Just leave any points of view, good articles or predictions in the comments an they will be added to the article.  I hope that this article proves to be useful to readers regardless of your current point of view on the topic.  If you’re formulating your own opinion on a given topic, hopefully it’s helpful to get the full spectrum of opinions on the topic.  And, if you already have a strongly held point of view, surely it’s good to pressure test your convictions with an opposing view every once in awhile.  So, here we go: 

The Case For Gold

  1. The devaluing of fiat currencies around the world through unprecedented fiscal stimulus will cause an increase in the price of gold.   
  2. Gold is a safe haven currency that tends to rise in precarious economic times like these.
  3. International governments will diversify out of their US dollar reserves and buy gold thereby driving demand.
  4. Hyperinflation is on the horizon – and that drives gold prices. 
  5. The growth of institutional and retail investment demand for gold. 
  6. Lack of growth in the supply of gold from mines. 
  7. Fiat currency has no intrinsic value.
  8. Others?

The Case Against Gold

  1. Gold doesn’t pay interest.
  2. Gold goes up when there’s inflation, and deflation is the far greater risk today.
  3. A safe haven asset like gold goes up when Armageddon hits, and we have avoided that. 
  4. Over the long run, history shows that gold is not an appreciating asset. 
  5. Asset prices are inflated by the dollar carry trade – gold will come crashing down
  6. Too much hype – sell high, buy low. 
  7. Gold has no intrinsic value.
  8. Others?

The Price of Gold/Oz.

  • $1,141.70 (11.19.09 – date of post)

Gold Articles

  1. Buy Gold, Not Miners: Jim Rogers
  2. What’s John Paulson Buying Now? Hint….Think Gold
  3. “I Don’t Believe In Gold,” Says Nouriel Roubini
  4. Others?

9 Responses

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  1. Rob Go said, on November 19, 2009 at 3:32 pm

    The main argument against gold: No intrinsic value.

  2. larrycheng said, on November 19, 2009 at 11:16 pm

    Rob, I decided to put no intrinsic value under “for” and “against”. I think the main argument against that you’re talking about is that since gold doesn’t generate yield, there’s no intrinsic value from a DCF perspective? Or do you mean it in another way? A lot of people say that fiat currencies have no intrinsic value because you can just kill a tree and run the bark through a printing press and there you go – more money. Interesting that you hear the same point on both sides.

  3. Ben Arend said, on November 23, 2009 at 1:46 pm

    One might argue that paper money has more “intrinsic” value in apocalyptic times since you could burn it to keep warm or cook something whereas gold would be completely useless. Interesting perspective!

    • larrycheng said, on November 23, 2009 at 4:04 pm

      Ben, now that’s one perspective I hadn’t considered.

  4. JoeyKnish said, on December 1, 2009 at 11:35 am

    You can also argue that gold is a proxy for fear/uncertainty. When the price of gold skyrocketed in the 70s, there was massive uncertainty. Arguments that gold has no intrinsic value is foolish, people like the yellow metal because its shiny and signifies wealth.

  5. KY said, on December 15, 2009 at 4:30 pm

    Another three cases against gold:

    1. the world governments collectively abandoned the gold reserve system since the 70’s and replaced it by fiat currency systems. Until the fiat money system fully runs its course and Armageddon comes, gold will be regarded primarily as a commodity. It will trade higher during mid-cycle crises like this one we are currently in but it will be largely forgotten by public in between the crises. Younger generations will only read about the gold standards in the history textbooks.

    2. the world’s gold market is about 5-6 trillion USD even at today’s valuation. This is tiny comparing to the monetary basis of the world we live in today. Just by looking at this ratio, there is no practical way to replace the fiat money system by some sort of gold standard in the near future. Gold will continue to be a temporary vault to store value; but hardly anything more than that.

    3. in the next 25-50 years, most developing countries need substantial growth to feed and cloth their younger and more ambitious generation. And the aging population in the developed world also needs such growth in the developing world to subsidies their retirement. The world demographics trends will drive for aggressive monetization in the name of growth. Gold certainly lacks a lot of key characters to serve such as a major currency in such a world.

  6. Tim said, on August 30, 2010 at 9:51 pm

    “Gold has no intrinsic value”. I’d like to know where you got that from. That could not be more incorrect.

    Gold has many properties that lend it intrinsic value. It is the one substance that has for the longest time in history been regarded by people as something of value, intrinsically — enough so to be used as a medium of exchange. It best serves the requirements for the medium of exchange, precisely because of its intrinsic value.

    There are good arguments against the assertion that there is not enough gold, so we need paper. Sorry, I don’t have links, but if you look you can find.

  7. Robert said, on September 21, 2010 at 8:15 pm

    The Case For

    The fastest rising economy on the planet (China) is encouraging its citizens to buy gold and the central government is as well. In addition, India, as well as smaller countries like Thailand, use gold as a form of informal trading.

    China and India – the two most populous countries, are long on gold.

  8. Thomas Rosen said, on January 4, 2011 at 7:02 pm

    I think the expert who describes the gold trade best is Victor Sperandeo. He is the creator of the Diversified Trend Index, and a former portfolio Manager of the Quantum Fund…a brainchild fund creation of Jim Rogers. According to Sperandeo, on the Upside Buy Gold Physically in case of hyperinflation, and on the Downside, Play Volatility in the Futures Market. There is a Great Interview on CNBC Fast Money talking about Gold.

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