Putting aside comments by George Soros that gold is in a bubble, consider the following quote from the Wall Street Journal: "historically, investors accounted for a relatively small portion of gold demand, with the majority driven by the needs of jewelers, dentists, and electronics manufacturers. In 1998, investors represented 6.9% of demand, in the second quarter of 2010 investors accounted for 51%." Investors now account for a greater share of demand for some good rather than its own consumers.
In 2005-2006 a similar phenomenon existed in Stockton, California. During that period more homes were owned by investors than actual homeowners. As was the case throughout the U.S. many people owned homes as investment properties and in Stockton, the city was awash in investment properties. This should make any investor concerned. When investors are crowding out consumers for a good you have to wonder; is this sustainable? Perhaps daytime TV ads could be a barometer for speculative investment. During the housing bubble lenders pushed their mortgages, now gold resellers advertise their want of your jewelry.
Investors in gold may retort that gold is a store of value. Unlike the U.S. dollar no government agency can debase the value of gold. The fed can print money to pay ballooning debts, but as long as a sizable gold deposit is not discovered, there should be no concern of a sudden increase in the supply of of gold which would diminish the value of your holding. True enough, but gold is a not a monopoly in store of value. There exist valuable art paintings, silver, platinum and other currencies like the Swiss Franc or even the Chinese yuan which is ostensibly undervalued relative to the U.S. dollar. So why not purchase one of these competing stores of wealth? A commodity is a commodity is a commodity. And one that has increased 400% in 10 years is not one you're buying on the cheap.
Gold has also been reputed to hedge against inflation. Gold, however, has tripled in price over the past 10 years (growing over 10% per year) even though inflation (CPI) has run at around 2%. On that basis alone, gold does not appear to correlate to inflation. The CPI is not the perfect measure of inflation, but it is fairly accurate. However, there are securities that are perfectly indexed to inflation. TIPS (Treasury Inflation Protected Securities) and Series I Savings Bonds are a few. If the dollar is your concern, buy stocks that make the majority of their revenue internationally. Intel and Exxon are perfect examples of companies that get more than 70% of their revenue from abroad.
As foolish an argument was for housing a couple years ago, housing can at least be measured against the rents it earns. By that measure it had gotten out of whack in the mid 2000's as the Economist had reported. Gold and other commodities have no such feature. Instead the price of gold can only be determined by speculative activity determined by supply and demand. India is currently one of the largest consumers of gold for both the sake of jewelery and as a store of wealth. Since the rise in the price of gold a significant amount of selling has been going on in the country. This is just a rational response. Indians, like Americans, have budget constraints which cannot be exceeded. Further, there exist substitutes to gold. Silver, platinum and diamonds can all be used as jewelry.
Warren Buffett opined about gold's contribution to value, "it gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head."
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