Gold as an investment. The price of gold is moving, and it’s moving fast; the last decade of political and economic instability, and a social superstructure that has fostered a climate of uncertainty and unknown responsibility has created a speculative skyrocketing of gold prices. It seems reasonable to conclude that the price of gold is inversely related to the faith international citizens have in their governments. And of course, this is exactly what a fiat-gold relationship in our world should look like; gold represents, what many believe and history demonstrates, an alternative currency.

Gold is often considered in this sense, a hedge against social and political pressures. Fears that currencies may depreciate, that political stability may fall apart, or that war may break out is likely to be demonstrated in the rally towards gold as investors desire to hold less of their country’s currency. With internationalization, this threat trades best on an international market, where all countries are seen as at risk; gold is likely to increase rather than alternative currencies. Investors trading on a short-term often consider working with gold to capitalize on its speculative properties, particularly those associated with the political pressures; one may see the price of gold rally during the face of political instability, and return to value during political stability.

The price of gold, however, it seems has never truly grown — which is sensible: unlike investments in other areas, gold represents no real growth. Purchasing gold does not rent the capital to a corporation who may research or produce something new, something of value. Purchasing gold does not earn itself a rent in anyway. In this sense, gold is a store of value — or at least it should be. If gold’s actual use, in production of electronics, computers, jewelery, medicine and other non-monetary uses were to change measurably, the value of gold, being a limited resource, could jump similarly: historically, however, few of these changes have been seen. The price of gold makes it unlikely that “accidental” uses of gold will be discovered, as there is often a cheaper alternative.

The World Gold Council, a collaborative funded by gold mining companies says that a number of research programs are ongoing examining further uses of gold in advanced electronics, fuel cells, cancer treatments and chemical catalysts and that roughly 40,000 patent applications have been granted in the last decade relating to technological use of gold. This group does, however, have a vested interest in both the real and perceived value of gold.

Gold’s current primary use in industry is in computers and jewelery. Being ductile and malleable, gold makes for an excellent material to work with to produce ornaments — historically, and still today, the biggest consumer of non-monetary and investment gold is indeed in jewelery, with India being the biggest area of the market (18% of global consumption).

The World Gold Council estimated in 2005 that the global supply of gold (as a flow) was about 3,860 tonnes; while the demand at market prices hit about 3,750. If this is accurate, the surplus of gold should mean gold, at some value level, is depreciating (or at least was in 2005; since then, a flock of investors towards gold — due to external forces — may have adjusted things).

The next paragraph refers to “1979 dollars.” The best way to understand this is to think about buying power rather than nominal money. If you’re not educated in economics or finance; simply consider 1979 dollars to be the same buying power today, in a previous year. These “1979 dollars” are calculated by discounting the U.S. Consumer Price Index across the 28 years between then and 2007.

Gold, today, is trading at about $930 U.S., arguably it’s inflation-adjusted value. Gold demonstrates itself to be a good investment in response to expected inflation — simply, it acts as an alternative store of value. If gold is held during periods of inflation, then cashed out at the ‘end,’ it seems to return roughly the same buying power. Investors who bought gold in 1979 at $473 U.S. an ounce would now have roughly doubled their money (though, a slight loss in 1979 dollars - roughly $303). The same investor who invested his money at 6 per cent per annum (if he could find it) would be left with $2,716.67 in today’s dollars ($887.74 in 1979 dollars). Investors who held their $473 in cash would now have about $154.57 in buying power. Perhaps gold should be considered a modern day currency — one resistant to the negative inflating effects of central banking and monetary control.

This leads us to the conclusion though, that gold truly has not appreciated in value. In fact, the original 1979 comparison suggests that gold may have lost about 170 1979 dollars of value (479 2007 dollars). This could simply outline inaccuracies of the CPI, speculation changing the value at the beginning or end of the measured period, or an increasing ’stock’ of gold — in fact, it’s likely this is the case: investors and financial analysts; such as Dr. Ray Jastrom, regularly publish analyses of the price of gold suggesting that in terms of real buying power, it has a fixed association with real assets over centuries.

Gold’s primary advantage in terms of speculative or inflation hedge investment, is that unlike other “real” investments (notably, real estate), gold is highly liquid. Selling a property, even at its “market value,” during an economic collapse may be difficult: selling gold likely won’t. Even in circumstances of absolute panic, gold holds its own. This still reaffirms the fact that gold is a fairly good store of value.

One analysis simply concluded that gold historically, forgiving improvements in production procedure (suits today are arguably much nicer than they have been in the past) that an ounce of gold would always buy a nice suit and a pair of shoes. This seems to hold true today, as it does historically. The question we are left with at this point; is that if all this is true, what explains the up-shoot in gold prices (to what would be inflation-adjusted prices) after 2002? Did a shock in political stability (9/11-related, perhaps) cause the market to speculate above value, or simply to readjust to what value should’ve been all along; or has inflation actually determined “what value should’ve been” as something growing rapidly over the last decade?

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