Retaining value - what exactly does that mean?

James West has an interesting piece at Midas Letter - Gold Price Prediction

When anything, be it stock, bond, currency or commodity, reaches a new high, the impetus for selling into strength and taking profit off the table are enhanced dramatically. With gold’s new record high, there are plenty of holders of bullion who started acquiring it in the first years of the millennium who are now sitting on profit equivalent to 3 times the money.

The question is, however, sell gold in exchange for what?

Certainly trading gold for U.S. dollars is akin to forward selling gold at an incrementally lower price. Anyone smart enough to own gold since 2001 is unlikely to be so silly.

Renmibi might seem like a good trade. The only problem with that is you can’t easily spend renmibi at Home Depot or Safeway or Nordstrom.

No, there’s really no substitute for gold at this point in the global currency landscape. And so, the normally present impetus to sell and take profit has been castrated by the lack of anything else capable of retaining its value.

OK. I get that. But the question then becomes, what exactly does he mean by retaining value? If there is nothing that you would accept in exchange for it, how much "value" does it have?

I always look at the extreme case such as me having the last plate of food on earth and you having all the gold. How much of that gold would you give not to starve to death? How much gold would I accept to commit suicide?

Since the person who survives gets all the gold anyway, the only thing that has "value" is the food and even that is losing value the longer I remains uneaten.

I completely agree that exchanging gold for fiat money is a fools bargain, but once you have the gold you too can get fooled by seeing its exchange rate (as distinct from its value) constantly rising against all other possible "stores of value". Storage of any kind only has value if it is able to be released. from water in a dam to grain in a warehouse to savings in the bank, the storage part only works if the release part can take place. So how do you release the value stored in gold?

At some point you have to exchange it for something in the certain knowledge that you will never be able to get it back at that price, it will always go higher.

Well it will until all those left holding all the gold realise that it can't be eaten, worn, lived in, burned or used as medication, and if all anyone else wants is food, shelter, clothing, fuel or medication, how exactly do you sell your "assets" in exchange for something you actually need.

In complex societies the location of value is seriously camouflaged, and we can get carried away by the idea that, just because gold is durable and unchanging it has some kind of intrinsic value that can be locked away. I don't believe it.

Show me the mechanism.

Comments

[Saltation]

gold in this context (nonindustrial) is money. ie, people's recognition of value/status.

money is the negative of wealth -- you can't eat it, drive in it, sleep in it. if i sell my car, i have cash but am poor: i can no longer drive to the beach -- i am poorer in life terms. money is a wealth transfer mechanism, a temporary (and fungible and effortlessly transportable/exchangeable) storage of value rather than value itself. think of it like potential energy. the stone doesn't actually express that energy until it actually rolls down the hill.

but speaking just to gold's monetary equivalence (price): be aware that though peak oil is a myth (proven reserves explode as the price rises and just the new finds off Brazil add almost as much as Saudi has even at $30/bl, and it can be indefinitely manufactured using only water, marble (an extraordinarily common stone, if you don't demand sculpture-purity), and heat), we do appear to have passed peak gold. despite very very motivated efforts, world gold production is declining.

medium to long term: in the absence of amazing new finds, gold price will only increase.

[Earl Mardle]

I love the idea that it money is the negative of wealth, exactly, in fact, the less useful it is the more ability it has to become money because otherwise we would use it for something else (imagine a turnip money, OK, pineapples then)

I'm betting that gold will rise in price alright, but a lot of that will only be against the devaluing other forms of money (so its a hegde) but even then, only up to a point. China and India are con\rnering the gold market at the moment and at some point most of the gold will be "owned" by the usual few suspects.

But money is only good, as you say, when the rock rolls down the hill. Unless it is moving its worthless. But while we see it as a long term 'store" of value, we will hoard it and cripple the economy anyway.

The issue is how to make sure that the gold, or whatever, flows and right now almost nothing is flowing.

Speaking of which, we disagree on PO, the cheap/easy/plentiful stuff is gone. This stuff is making its way into the mainstream now and I think its because they can no longer keep it under wraps.

While its true the proven reserves did grow for years, that has stopped because it ain't there any more and in some cases never was, the growth was an attempt to game the system, but when you reach the critical point you either put up or shut up and the liars poker game is over.

This was the turning point.

"But the first detailed assessment of more than 800 oil fields in the world, covering three quarters of global reserves, has found that most of the biggest fields have already peaked and that the rate of decline in oil production is now running at nearly twice the pace as calculated just two years ago."

While Brazil is turning up large quantities of oil, 33 billion barrels possibly in the Carioca field, another 12-30 billion in Guara's patch, of the latter only about 8 billion are recoverable meaning about 2 years of US total use and its gone and in any case it will produce at only 120,000 barrels a day which is a spit in the ocean.

According to Birol we need another 4 Saudis (plentiful, clean, cheap oil) in the next 10 years just to stay even and that isn't happening.

As for being able to make it from water, marble and heat, sure, I'll accept the science. But it just moves the problem.

How much heat (and to what temperature) do you need to make a barrel of oil from water and marble and where do you get it from? Really, where does that heat come from? What do you burn to make it hot enough to do the conversion and what would be the energy cost of building the plants?

And what is the EROEI?

Even at 50% efficiency you would need twice the energy in a barrel of oil to create a barrel of oil. What percentage of the world's consumption can you replace with that kind of calculation?