What is gold?

Dear readers,

In a thread entitled, “How do i invest in gold” in Channel NewsAsia forums, a fellow member, Aurictaurus has posted some interesting propositions on what exactly gold is, and why anyone would want to own some.

Proposition #1 – Gold is money
If gold is money and fiat currencies are only ever backed by politicians’ promises. Gold-is-money holders do not expect to get rich by owning gold, they merely wish to avoid being made penniless when politicians print and spend their way to oblivion (see Zimbabwe above).

Proposition #2 – Gold is a commodity
If gold is a commodity, then supply/demand economics and rotations in asset class fashions apply. Gold-is-a-commodity holders do expect to reap rewards if they have correctly identified the bull market and a possible depletion trend (Google ‘peak gold’).

Proposition #3 – Gold is a store of wealth
This one kind of conflates prop #1 & #2 together, plus it’s got 5000 years of historical precedents that confirm it. Gold-is-a-store-of-wealth holders don’t believe much anything else is a store of wealth and feel they have bought insurance against most risks (see Zimbabwe / US Debt mountain / Peak Oil / Middle East / Etc., etc.)

Aurictaurus also shared his opinion about some concerns voiced by fellow forumers about the falling of USD and rising of SGD reducing asians upside in profits.

As for US$ falling and S$ rising reducing your upside, I don’t think that’s how it will work. Imagine US$-S$ 1:1 parity (like a Samsung commercial, ‘it’s not too hard to imagine’). If we got there because the US$ fell in value compared to the S$, it would slide against gold as well, then each additional ounce of gold you wished to buy would cost you more or less the same as it does now: US$1000 or S$1000. If we got there because the S$ rose in value compared to the US$, then each new ounce would cost less S$ than it does today: S$650 or US$650, but, each S$ would buy more crude oil, more electricity and more car than it did before, in fact anything priced in US$ and imported into SG would suddenly become much cheaper.

The point is, US$ goes down, US$ goes up, or any other currency rises or falls, gold will hold its value pretty constant. An an ounce will still buy you a modest suit of clothes – which has been true since Roman times. The three propositions above are not mutually exclusive – like light, which can behave like a particle or a wave, gold can be different things to different people at the same time. I maintain that it is because gold is a store of wealth, it treated like a valuable commodity and used as money. When you realise that a US$ bill will only buy 1/650th of an ounce of gold, you’ll soon want to tip them out of your wallet and rush to the nearest gold window to exchange them for something more tangible…

To read more about “How do i invest in gold?” in Channel NewsAsia forums, click here.

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