Lazy Man, guest poster at Consumerism Commentary has this theory that Gold isn't all it's cracked up to be. I tend to agree.
Here's my (some call stupid) theory.
Gold is seen as somewhere safe to park your money when things aren't looking too crash hot. For example, in times of war and high inflation, gold prices usually increase. This is due to the ancient tradition of gold being traded as a currency.
However, you need to think of what gold really is. Gold, like copper, zinc, lead, tin & silver is a metal. It is a good conductor and most females believe it looks pretty on their hands. That's it really. It's practical uses are relatively limited, and whilst its not the most abundant metal, it's certainly not the rarest. You can't build a house out if it, you can't build a road out of it.
So, I think you see where I'm getting to. Gold, at around $650US an ounce is very expensive for what you can do with it. 70% of gold is used for cosmetic use only, so it's practical demand is really not very high. In fact Wikipedia (and we know Wikipedia is ALWAYS right) says that approximately 20% of gold above ground (ie, gold that has been mined) is held in reserve within central banks. The reason for such huge reserves is firstly because back in the day most currencies were pegged to the price of gold, and secondly because I think Governments hold onto it just in case of a doomsday event, where paper currencies become worthless, they have something to exchange for goods and services.
The Indians have a fond affection of gold, so I can only imagine that as their economy grows and more people join the middle class that their demand of gold will increase, but somehow I don't think this demand is going to greatly increase price. Lazy Man has predicted that demand for gold will decrease as a jewellery item because his wife/girlfriend doesn't like it. However, with the gold I see on women in the world (and a lot of men!) I can't say I agree. The price of gold, unlike other metals does not follow trends on supply and demand, but more on the state of the world/economy.
However, this day and age, where you can click a button to buy another currency, does gold need to be used as this security blanket? If I believe that my currency is going to depreciate due to inflation I can buy another currency that I do not believe this will happen to. If i think our economy's going down the shute, I'll buy consumer staple shares. If I think we're going to war I'll buy shares in metal producers (who knows, we might see gold plated guns and grenades?). At the end of the day my gold bullion (or someone elses) isn't going to provide me with income.
In short, I believe it's time for the world to move away from its fixation on gold as a commodity and look at its real practical value. However, call me a conspiracy theorist, but with 20% of the gold in the world sitting in Government vaults, something makes me doubt the central bankers of the world aren't going to let gold fall to $10 an ounce.
For the record, this graph shows the rise in price of gold in the last few years. I wouldn't mind a few nuggets sitting under my bed. I first unveiled my theory to my colleagues in January 2006. Gold prices have since risen about 30%. Shares in Lihir Gold (who they were trying to talk me into investing in) have risen around 50% over the same period. I'd love to come back to this post in a few years and gold prices are down the bottom of this chart. I doubt it though!
*Edit - I just came across this article by David Potts. He doesn't seem to agree with my theory!
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