This guy doesn't like precious metals.

Well this is where I guess I get accused of being a PM basher. Doesn't ALL metals fit this description? I mean, if this description is IT and is the basis of PM value, why is platinum, palladium, or rare earth metals valued more highly? Rare earth metals as a percent of usage versus scarcity are MUCH more needed and rarer.

I will tell you why, its because gold and silver were the rarest metals known and obtainable 5000 years ago. As such, they were taught to people they are "valuable", and that has carried forward to today. If the ancients had known and were able to mine platinum, the price of platinum today would probably be $40,000 an ounce since its so much rare than gold, (or Pt would be $3000 an ounce, and gold only $500).

So, instead of INNATE value, when you buy PM you are buying some industrial demand, and a whole bunch of historically taught demand. THAT is its only real value at all. I am fine with that, though. More money has probably been made based on human emotions than anything in the world, so I am completely ok with knowing PM's value is pretty irrational, and not innate at all, but the chances of it continuing is around 99.9%.

Go ahead Inflexion, blast away on how I am a "hater".

 

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Not when it comes to resistance to corrossion but to be honest, many different metals have been used as money Iron, Zinc, Nickel, Steel, Brass, etc...and other material such as Leather and cloth. if anything I would say if you are simply going on the 4 characteristics, nickel is probably the best bet but as you say, nickel was not really viable 5000 years ago so they went with the softer Gold and Silver....so people dont hoard nickel (as much, I assume there is someone out there hoarding it).

Here is an iron coin



Here is a zinc coin



Here is an aluminum coin



Here is a bill made from cloth

 

I agree with you to an extent, but there is more to it. Gemstones have added value based on aesthetics - the type of cut. A molecule of gold is worth a molecule of gold regardless. The other thing with gemstones is that they are used in science for refraction, so the cut does matter beyond aesthetics. Gold functions the same regardless. This is in large part why gems are not fungible.

I think we are just having a misunderstanding around definitions. Forget the word finite or infinte. It matters not. The point is that we can create more cotton. We can't create more gold. Yes we may be able to get more gold from other planets, but we can get more cotton from this one. I won't dispute that water is more necessary than gold. I have lots of water. I'm not saying gold is the end all be all. I'm saying just what I've said - it is in limited supply unlike all other commodities which we can reproduce. Limited simply means there is a ceiling (on our planet). That says nothing as to how high or low that ceiling is.

 

What's more irrational, valuing a piece of paper that has a practical value of nearly zero, that is printed en masse at the behest of bankers/government for their own profit, or valuing something that is difficult to obtain, rare, and useful in industrial applications?

There is nothing irrational at all about the value of PM's in my opinion as there is no better alternative.

 

Yes, they are fungible, but to meet the requirements of a unit of account and a store of wealth something must be fungible and divisible and durable and portable.

And yes, the value of gold was set long ago. Genesis Chapter 2, the 2nd chapter of the entire good book specifically says that gold is good.

I would even go as far as to say that gold has no value outside the human mind. In fact nothing has value outside of that since value is whatever we deem it to be. Usefulness on the other hand, gold is relatively useful, but there are better and cheaper alternatives for everything that gold does so it really has no "practical" use at today's prices.

So then, why is it so valuable? Gold has over the course of time consistently fulfilled the role of money because that is what it is good at (see the 4 rules I mentioned earlier). Since that is in fact really the only practical use gold has, and has always had, and nothing else is as practical for that due to having other uses (silver for example is industrial and so does not make as good of money as gold, although it is certainly better than any non-metal), gold is the true barometer for currency power and not much else. It's not that gold has inflated valuation. It is that currency has inflated supply, and gold simply reflects that.

 

No better alternative to PM? In what way? I do not sit on a pile of FRN's at home believing I have made a terrific investment decision. PM has to be weighed against other potential INVESTMENTS versus FRN's. Anyone sitting on a pile of dollars really is a dolt. I keep enough dollars around to pay for me living and afford my hobby, the rest I invest in various investments.

I don't think the discussion can really be framed that its either USD or PM, as I believe almost any sane investor will let you know cash returns zero percent return.

 

Cash is a negative return when taking inflation into account. PM's are more of a zero return game with inflation calculated in, with the potential for gains due to being potentially undervalued. They are the safe play. You might make more in stocks or real estate or whatever, but those are not going to protect you from the same things that metals will, namely counter party risk which is my biggest concern personally.

 

We are close sir but still am not buying it. To me, its simply a "shared delusion", and this delusion was taught to others long ago. I view golds price increase as MAINLY being the result of suspension of central bank sales, and oil increases. There might be some other factors too, but to me those are the main ones.

Like I said, we are closer to agreement. I simply prefer to discuss and understand such things to know the basis of my investment and for intellectual curiousity. Like I said, feeling the way I do does not change my opinion of PM as a good contra asset one iota. I still believe its a part of a nice well balanced portfolio, and will most likely continue to be for my lifetime.

Concerning scarcity arguments, I am actually more in agreement with you on silver than gold. Because of golds properties and weight, its simply easier to find and extract than silver. Silver is a SIMILAR market in terms of taught "value", but not identical, and there are a lot more things going on in it than gold.

 

Yes, but some people are not intelligent enough to figure that out and do sit on big piles of cash because they think its safe. Sit on cash for 10 years and your real return is prob -50% if not worse in purchasing power.

That is why the currency should be gold/silver, either or both. People would maintain their wealth by holding onto currency rather than losing it slowly over time through inflation. The only people benefiting from it are the bankers and the government, everyone else is getting screwed. (assuming they don't get money from the government, if they did then they are benefiting from it in a way)

Obviously PM's are never going to be the highest returning investment in the world, if you can pick the right stocks that will always provide a better return. At times precious metals will outperform stocks as a general group though, and I believe that recent trend will continue for awhile longer at least.

 

At the very least the government should allow competing currencies, gold and silver should not have any taxes levied against them, that would allow for a fair environment where people can freely choose between using fiat dollars or precious metals.

 

There's really not much difference in this case. Delusion is the same as perception, and in some cases perception is reality. Although I typically dislike that phrase, it is what it is. Value is whatever the collective human consciousness decides. If everyone believes in the delusion it is no longer a delusion but is in fact reality as long as reality doesn't fight back. If we all believe we can fly for example that doesn't mean it's true, but if we all agree gold is money then it is. Currently we are amid an information war about what money is because there are many vested interests on both sides.

I am focused less on whether the supposed delusion is real or not, and instead focus on what history has shown to consistently be the case. Gold has been money for all of human history until 40+ years ago, and that only changed because we couldn't pay up, and it was only in a position to change because silver had already been demonetized, and silver was only in a position to be demonetized due to Gresham's Law because Alexander Hamilton enforced a fixed GSR instead of allowing the free market floating exchange ratio to do its job. It was actually a very carefully crafted multi-generational plan and people don't seem to realize that, and it only took 16 years after the founding of the USA for the powers we earned our freedom from to begin to take our country away.

In my perception, history has a much stronger case than fiat. Although I do not agree with you that it's a delusion, because of the 4 rules of a unit of account and store of wealth, but it doesn't really matter anyway because it will be whatever we decide. I feel strongly that history will win out, and I am hoping it will win in my lifetime, but if not then it will be a gift to someone else.

 

I thought that its rarity and difficulty to obtain weren't why its valuable...we are going all over the place. I would think either one is just fine seeing as though, as currency, their value is really just what we say it is. Certainly we buy our gold with paper no? If you are talking practicality, give me light paper banked by a central authority over Gold any day...both are pretty much useless without central authority setting value. Now as a commodity for its relatively modern practical uses...sure...but the price is so discordant with the practical industrial uses that it is cost prohibitive...certain still about 90% of all gold is worn and hoarded.

There is nothing more irrational about gold than paper...both serve the same purpose in an economy and are relatively worthless in a practical sense without fiat value. Well...we dont use gold money anymore...thank god.

 

Oh really? I didn't know that the central bank/authority set the price of gold, you'll have to show me where you found this

Good luck with your paper, at least you'll be able to stay warm if need be.

 

Yeah, thank goodness. Imagine the damage to your pants from all of that weight?

People forget WAY too easily how humans simply PREFER paper money. You want proof? Look at how common paper currency was in circulation from 1900-1933 versus gold coins. About 99% of everyone preferred a $20 paper bill to a double eagle. That is why most gold is very lightly circulated, if circulated at all. Just try to find a double eagle as circulated as most barber coins are, and this is even taking into account how much softer and quicker to wear gold is versus silver.

Or, even easier, see how much dollar coins circulate today if there are dollar bills also in circulation. You have to physically remove the bills of a denomination for a coin to have ANY CHANCE to circulate, most humans hate them so much.

 

Paper is good for ease of transaction, that is about the only good thing that could be said about it.

Paper money is also not inherently bad, if it was not abused it would work fine, unfortunately the power brokers prefer to make money by any means possible, immoral as they are.

 

I agree, but the ease of use is most important to most people. Most are lemmings and/or not interested in this subject unfortunately.

While I do not think it will be as bad as some here, and maybe disagree as to the SOLE ability of PM for protecting from inflation as some here, I generally agree with the general sentiment.

Plus, silver is so gosh darned pretty, especially in an ancient coin.

 

Well, the bible said you should tie your daughter to a post and stone her to death if she has premarital sex so lets not use it as a source...simply because ancients did something means nothing. It hasn't been used as currency for all of human history.

We are getting somewhere as you acknowledge that gold has 'no value outside the human mind' but you err when you say all things are that way...food, trees, oil, diamonds etc...these have value to us for very practical, and sometimes very crucial reasons...not because we think they do...because we have real practical need for them, many things we put value on we must have to survive.

You are now falling back on the supply and rarity issues that are more a common reason why it is valuable but still admit that other than as a currency or a store of value it really has had no real practical use historically to recommend its high value...because with most things, if its rare but has no real use, its rarity alone doesn't mean high value. Then you say that its value isn't inflated...right after you acknowledge that is relatively worthless save for being a bit more ideal at being a medium for fiat value....and to be honest...some might argue its not very ideal as a currency and that is why it isn't used as a currency anymore...

What about Nickel? It would serve your criteria far better than gold anyway so why don't we horde and base our economy on that? Its also finite, durable, etc...

And oddly you say silver isn't as ideal because it has use in industry but it has historically been the metal used MOST for currency and both, today, are sold as commodities exactly the same way and both have modern uses in industry...

My only point for being a part of this discussion was this: gold has no value outside the human mind. Since that (currency) is in fact really the only practical use gold has, and has always had.

And we seem to be in agreement on that.

 

I never said a central bank set the price of gold...the commodities market does and stable governemts foster the market to buy and sell and value it

At least the paper will keep me warm...I can make a blanket out of it, burn it, write a note to someone on it...thats three more practical uses than gold. If you honestly think without a central authority...that is a government and a market... that gold will have any more value or use to you than paper...you are in for a bit of a shock but I hope that never happens.

 

Nothing has value outside the human mind. I was merely articulating the origin of value to illustrate that yes, you are right, and it doesn't matter. It is not unique to gold in any way. What gold does not have is "practical" (applicational) value as a commodity because it is too expensive to be cost effective. I am not falling back on supply and rarity issues. Sure, with silver supply and rarity above ground is a concern, but with gold it has everything to do with currency supply, not gold supply.

Yes, silver has traditionally also been money, and quite a few of the world's languages use the same exact word for 'money' as 'silver' and has historically been the most common currency, yet today is not. This is simply due to scientific breakthroughs we've experienced in this age of technology that have vaulted silver to the 2nd most useful commodity where as in the past it was just a shiny rock. Silver would not make as good a circulating currency as it used to, because it is in limited supply and the industrial demand would not be met, but a dollar backed by silver or any other metal would work too. Nickel would be a fine currency, so would copper, so would aluminum if it came down to it. Any metal meets the 4 requirements and would be just fine. The only difference would be the buying power of your currency, but you could peg to any of them and essentially have sound money.

It is the effort (labor, cost) it takes to get it out of the ground (which is in part due to rarity) that determines which are more valuable, why some are considered precious and others are very cheap. It's not because of the available supply on the market (in gold's case) which really means nothing (as long as there is not a shortage) otherwise silver would be more expensive, but rather it's the availability and ease with which it comes out of the ground which is tied to the labor cost to extract it.

Money represents goods and services (labor), but when you can print money out of thin air that correlation is undermined. This correlation cannot be undermined with metals which cannot be created from nothing, and is why they go up in price when new money is printed. Money is like a pie crust with goods and services as the filling. If you make the pie bigger without adding more filling then the filling will spread out to take up a larger slice of the pie.

Gold is only different from other metals because it does not have (very much) industrial value, so the others are more skewed by that where as gold is purely monetary, and so it assumes that role being the most appropriate to do so. Since it is not impacted by supply and demand it really makes it the perfect money because it is immune to market manipulation (not true today with paper gold unfortunately). That doesn't mean it has no value. It just means that its value is derived from its purpose, not its content, but its purpose is dependent upon that content so they are related. If gold wasn't a monetary metal people would still wear it as jewelry, but it would be a lot cheaper.

 

In Rome the rich had the solidus, which was a gold coin, while everyone else had to use the denarius, which devalued until it was made of almost no silver at all. Every time they devalued the coin they would boost soldier's pay. Eventually nobody wanted the money. I think we are about 50 years past the point when real money was around, so most people have forgotten what it was like having real silver coins in their pockets. They could make money out of plastic now, and nobody would even notice.