Where Next For Gold

gold_barWhat’s great about gold is that no one can tell you what it is really worth.

What’s terrible about gold is that no one can tell you what it is really worth.

No, I haven’t lost my marbles. And yes, the two statements are contradictory.

But that is the burden you have to bear if you hold gold. It is only worth what someone is prepared to pay for it.

Some people claim that gold is a safe haven in time of uncertainty. Others claim that it is a hedge against inflation. Then there are those who say that gold is not correlated to sovereign currencies. So, as many developed economies print money as though it is going out of fashion then, in theory, gold should maintain its value unlike those depreciating currencies.

But let’s not forget that currencies are valued in pairs. So, if one currency falls then another currency must rise.

For instance, the US dollar has depreciated around 20% against our Singapore dollar over the last five years. It is therefore understandable why someone in the US may want to hold gold as an insurance against the falling greenback. But why would someone in Singapore want to do likewise, other than because they think that gold could carry on rising.

When you buy something simply because you think it will go up in price then you are betting that it will continue to rise. That is not investing, which requires an understanding of the intrinsic value of the asset you are purchasing, other than hoping that demand for the asset will outstrip supply.

Many of you many point out that the stock market is based on supply and demand too. However, there is a big difference between shares and gold. Shares can be valued on cash flows. And the more you know about the share, the more accurately you can estimate its intrinsic value.

Gold on the other hand cannot be valued using traditional methods. It is only worth what someone is prepared to pay for it. This could be based on fear or greed or some combination of both.

There is no denying that gold has had a good run over the last decade. In 2003 an ounce of the precious metal cost around $350 an ounce. Today it is some 300% higher despite its recent tumble from $1,800 to $1,300 an ounce. The reasons cited for the fall are manifold, just as the reasons for its rise over the last decade were manifold.

However, as an investor it is important to know what could drive the price of your investment. With each of my investments I can tell you what I reckon are the intrinsic values of those shares. Whether the market agrees is a different matter. However, I can’t say the same about gold, which is why it has no place in my portfolio. I am an investor not a speculator.