What Good is Gold?

Gold is a wonderful conductor of electricity. Gold looks pretty wrapped around your finger. People risk family fortunes financing gold hunting expeditions. Entrepreneurs invest retirement accounts in this gorgeous yellow metal.

Why?

We're all betting the price of gold will steadily increase, except for the engineer who builds circuit boards with gold traces. Once the gold has been committed to connecting integrated circuits, any dramatic rise or precipitous fall in the spot price of raw gold becomes meaningless. Everyone else lives and dies on daily fluctuations. We invest in gold because we crave security and we hope that somehow gold will continue to become more valuable even as national currencies lose ground to inflation.

Investing in gold ostensibly provides a level of protection against currency fluctuations. If the dollar plummets because the United States Government doesn't pay its bills, gold will (hopefully) remain outside the fray. The vast majority of other institutionalized investment vehicles somehow connect to greenbacks, which might become problematic if the US treasury stops answering the telephone when collection agencies politely inquire.

Interestingly enough, the spot price of gold still enumerates in US dollars. Should the dollar lose 1% of its value, gold needs to gain 1% in order to break even. Over time, which is how all investments are measured, the gold crowd prays that their metal will appreciate faster than the underlying dollar bills depreciates.

Given a pot of gold squirreled away in a fireproof safe, buried in the back yard, or nestled in a Scandinavian bank: what can we do with it?

We can consume our gold. We can build it into electronics, thereby taking advantage of its relatively excellent conductive properties. We can use it as a therapy: some cultures insist it offers healing properties for arthritis and other ailments.

We can make it into vanity-based items such as rings and necklaces. Should we be sufficiently crafty, the price of our newly created stuff will exceed the labor plus the cost of the original raw material. Certainly this price will be even more arbitrary than what we paid for the raw gold.

Beyond these tempting possibilities, gold pretty much sits there. It may appear extremely attractive arranged in neatly stacked piles of bricks. It always makes a good doorstop due to it's relatively high mass-to-volume ratio.

Gold is purchased with dollars, then the price of held gold is measured in dollars. No one uses their gold to buy more gold: the act of purchasing gold involves trading green paper for yellow metal. After the transaction, anxious investors monitor real-time charts and graphs depicting the current price of gold, the spot price, in dollars. We are pretty much stuck with those dollars, at least until some other currency proves more stable.

The value of gold is almost, but not quite. completely arbitrary. Investors and speculators may flock to gold when other opportunities that appear to be less dependent on currency seem to be unstable. This flocking increases demand, which drives up the price. Gold becomes more valuable because more people think it is more valuable.

Price is an opinion. Purchasing anything is simply a way of agreeing with that opinion. Gold is no different. When sufficient quantities of investors agree that gold is worth more, the price will go up. When those investors decide that platinum is prettier, the price of gold may suffer.

Consider a single share of stock in a traditional bricks-and-mortar corporation (we trust that this corporation is telling us the truth in its' annual report, which may be a specious assumption these days.) Each share of stock is backed by a minute percentage of the value of the company. Certainly a shareholder cannot stop by corporate headquarters and exchange their stock certificate for a box of pens, but the philosophy is still sound.

Gold is not as reliable. There is no Gold, Incorporated. Gold investors have no recourse should they become unhappy with the value of their investment. Enterprising diggers and panners may discover many more tons of gold tomorrow, thereby increasing the supply and probably decreasing the price. By comparison, owning a share of P&G may offer more reliability because no one will discover a heretofore unknown diaper manufacturing company anytime soon.

Yes, gold can rescue your investment next egg from disaster, except when it can't.

Eventually, gold will be translated to dollars. Our economy is dollar-based for the most part. Some bartering still takes place, but Wal Mart isn't pricing their back to school clothes in ounces of gold. Your gold will get you dollars which will get you T-shirts and Pringles.

Gold must be cashed in before it actually has any value at all. At some point a currency exchange will become necessary until a self-sufficient society arises that values everything in gold.

As long as your gold increases in value faster than my dollars decrease in value, you may benefit from owning gold.

What could go wrong?

Given that gold must be translated into a more portable currency in order to realize its' current value, markets must exist to perform that function. Yes, gold is currently fungible, but gold is backed by nothing. It's not edible nor is it useful for building shelter. Should society completely collapse, demand for gold may not persist. Investors who plan to survive 'off the grid' may be surprised to find their golden stockpiles somewhat valueless when everyone else craves a loaf of bread.