[Vision2020] 7-25-2011: Gold hits fresh record high at $1, 623.49/oz overnight

[Andreas Schou]

Ted --

It's still not wise. There are a lot of people who will tell you that
gold is a commodity of "intrinsic worth," which will retain its value
even when the value of fiat currencies depreciate. That's not the
case. But this widespread belief about the value of gold has led to
its somewhat unusual pricing structure. Think about it this way:

Because people believe that gold has "intrinsic worth," the price of
gold as a commodity is essentially the sum of hedge positions against
fiat currencies worldwide. When people are concerned about the value
of fiat currencies, the value of gold goes up. When people are less
concerned, the value of gold goes down. In that framework, then,
purchasing gold is essentially just a hedge against fiat currencies.

The problem is that the underlying belief leading people to purchase
gold is false: it does not have intrinsic worth. Consequently, the
value of gold is largely determined by people with a mistaken belief
about what they're buying, and people who believe that others will
mistakenly hold that belief. If you think the dollar will drop in
value (and I don't think this will be the case, unfortunately),
short-sell dollars rather than buying gold. Or buy something boring,
like pork bellies or molybdenum.

Instead of being in a market where the price is determined by a herd
of panicked, mattress-stuffing idiots, you'll be in a market full of
people who, wisely or unwisely, are trading on the market value of the
good itself rather than their subjective beliefs w/r/t other peoples'
subjective beliefs.

-- ACS