1/11/17

People say gold is real money while our paper bills are not, because fiat money has no intrinsic value. However, in this article people are dumping gold at a record high now.

Gold has been on a wild ride since the U.S. election, plummeting immediately after Election Day and regaining a bit of ground since the final week of 2016.

But despite its recent gains, gold just saw its eighth consecutive week of outflows, according to a recent report from Bank of America Merrill Lynch in which gold was deemed "shunned" by investors. Those eight weeks, according to the report, mark gold's longest outflow streak in three years.

In my opinion, most people hold gold to hedge against market uncertainty. I don't think gold is a bad commodity to buy. It is just that people have found a better place to invest their money, but what do I know about commodities.

Do you think gold is a bad commodity to buy now?

Comments (15)

1/10/17

People are ditching gold for equities because they've been on a tear recently, but that won't continue indefinitely. Also factoring in the bond sell-off, people are prepared to leave relative stable assets for more volatile ones, which has further amplified the strength in equities.

Commodities themselves are cyclical, so if anything I believe now would be a good time to buy gold as you would be getting it at a relative low. Not saying that gold will go back up to 1800, but I definitely see it having an upside.

Financial Modeling

1/11/17

inflationiscoming

1/11/17

Could you explain

1/11/17

Trump is the "inflation president". I feel like we're at the beginning of a new cycle. Gold is selling off, but so are bonds and utilities. By the time we are full and on the way in the cycle, safer assets will catch up, once we see stronger evidence of inflation picking up. So, if anything, you should start buying gold once it gets to the bottom along with utilities.

1/11/17

The time to sell gold was late this summer.

Investors at this time are getting more comfortable with higher risk assets and gold isn't quite risky enough.

Best Response
1/11/17

My view on gold.

Most commodity markets tend to be driven by a few basic factors which are freight on one side, price on the other side and qualities.

Gold like money, has no fundamental 'intrinsic value' and has substantial extrinsic value, time-value attached (theta).
That's why it is so difficult to trade.
What this time-value is worth depends on what is the underlying value you desire to store (monetary risk, currency risk). Likely it's what you pay as premium for gold to insure against tale events.

Gold demand tends to be mainly driven by Asia.
Currently gold faces exceptional bearish headwinds (monetary policies and U.S fiscal policy).
There is no imbalance in physical gold markets. China is at parity with London, you would lose to move physical gold from the West to the East.

For me, the bullish case for Gold is a rally in China and Asia driven by seasonal demand on one-side and lower initial exchange margin on the paper side.
You closely manage your stops & entries. Personally I would use a collar, hedge against potentially the downside while retaining some ability to profit from potentially rising gold prices.

Following the Trump Event, institutions have liquidated the equivalent of 12% of the world production, prices have continued to decline, proof that there is not a lot a liquidity in the derivatives markets.
Physical Gold has, on the other hand enormous liquidity. Banks lease gold and precious metals for peanuts, means that sophisticated traders or producers can borrow IOUs gold/production to close a position. It's the inverse for most other commodities.
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1/11/17

How does gold not have intrinsic value? Gold can be used for many purposes while fiat currency is only backed by government and cannot be used to say make stuff.

1/11/17

How does gold not have intrinsic value?
-For me, Gold would have intrinsic value for the users of 'many purposes' IF there was a physical arbitrage or one can realize a profit buy buying spot, store and selling forward. That is apparently seldom the case.

Additionally, gold has no intrinsic value for a Central Bank (CB).

The Federal Reserve does not define its legal tender as gold (or any other commodity or tangible item) or currency convertible to gold. This analogy explains several aspects of gold trading.

fiat currency is an Asset on a Balance Sheet of a Central Bank, not a Liability, because Federal Reserve Notes pay zero interest and have no maturity date or future payment obligation of any kind. ( true at least CB in the G7 countries)...

If the Federal Reserve was forced to convert Fiat currency into Gold, Gold would have intrinsic value.
The total value of gold would be the intrinsic value (spot- Fed Gold Conversion Price) + extrinsic value.

Currently, we trade the only the extrinsic value (time-value, e.g potential value due to appreciation in prices).

1/11/17
Passionate Investor:

How does gold not have intrinsic value? .

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-For me, Gold would have intrinsic value for the users of 'many purposes' IF there was a physical arbitrage or one can realize a profit buy buying spot, store and selling forward. That is apparently seldom the case.

Additionally, gold has no intrinsic value for a Central Bank (CB).

The Federal Reserve does not define its legal tender as gold (or any other commodity or tangible item) or currency convertible to gold. This analogy explains several aspects of gold trading.

fiat currency is an Asset on a Balance Sheet of a Central Bank, not a Liability, because Federal Reserve Notes pay zero interest and have no maturity date or future payment obligation of any kind. ( true at least CB in the G7 countries)...

If the Federal Reserve was forced to convert Fiat currency into Gold, Gold would have intrinsic value.
The total value of gold would be the intrinsic value (spot- Fed Gold Conversion Price) + extrinsic value.

Currently, we trade the only the extrinsic value (time-value, e.g potential value due to appreciation in prices).

1/12/17

Pic related is from my excel sheet on gold futures in the last 9 days.
I've been long (1 lot) throughout them; black cell background indicates stop loss (6 dollars price move in opposite direction) on 2 days.
Light green is a profitable trade <6 dollars move, on 1 day.
Dark green is profitable >6 dollars move on 5 days.
Bright green is a major profitable trade (18 dollars price move) on 1 day.

I'd say it has been pretty good so far.

No it isn't the time to dump gold yet.

1/12/17

Gold is something real (a physical element) that is value dense and very expensive/rare to obtain - you have to dig out 30t of rock to get ~1oz of gold in most open pit mining operations these days (I work in a mining principal investing/trading group).

Back in the merchant days it was used as trading collateral in place of an IOU. For example, instead of me promising to pay you back for your Indian spices at some time in the future when I get back from Arabia with some linens, I will give you this valuable metal right now. Then when I return in a few months with some linens, you can pay me back the valuable metal. It becomes a medium of exchange that is more trustworthy than credit IOUs, if not for its physical properties, at the very least for its collateral value in commerce. Yeah, the spice merchant may not have a direct use for the metal, but he'll take that over an IOU because of its rarity and the understanding that it is valuable.

This is where it is useful - when trust erodes in society. Much of our commerce is based on trust. Trust in the fiat currencies, in the paper that is part ownership of a company or a company's debt obligations, trust in the contracts that underly our commercial agreements. If that were to break down, those instruments would have little value (no trust in them) but gold could still be used as a method of trade.

As to whether gold has much use, well at the end of the day once you earn enough money and have your needs met "money" becomes a tool of ego. So of course gold will have value, if only to display one's wealth, prestige, to create jewelry, to look pretty. It's the same reason why art is sold for such exorbitant prices. It becomes an ego thing. This becomes especially apparent if the modern economy shuts down, and only basic products persist. The "wealthy" will turn to gold to differentiate themselves rather than amassing thousands of pounds of commodities they have no use for to store their wealth.

I am no Doomsday proponent, but owning some physical gold would give me some relief that even if the world economy as we know it shifted dramatically (imagine if the world currency, the USD went out of control), I could still conduct business and hustle using some physical. I could approach farm owners, perhaps manufacturing plants, whatever businesses that still exist and perform financial transactions with my physical gold. "If you deliver me those sacks of grain, I'll give you Xoz gold as an IOU, give me a week and I'll take the gold back in exchange for other items of value to you". Then I'd go to another town and trade the grain for tools from the manufacturer. I'd bring the tools back to the farming co-op and get my gold back with a margin of extra grain and tools. Then I'd find a way to sell those items for other goods and hustle as a merchant. I could not do this as easily with my home, stock holdings, or other "assets", and certainly not fiat currency.

So at the end of the day one must ask himself a philosophical question "Do I think the world's current financial system will keep running smoothly with no hiccups over my lifetime?". If so, keep your money in stocks, bonds, currencies, and other asset classes and keep generating wealth. Gold will not be necessary for you. But if you have any doubts based on history, physical may be prudent to have.

"A real entrepreneur is someone who has no safety net underneath them." - Henry Kravis

1/12/17
born2bebusiness:

I am no Doomsday proponent, but owning some physical gold would give me some relief that even if the world economy as we know it shifted dramatically, I could still conduct business and hustle using some physical. I could approach farm owners, perhaps manufacturing plants, whatever businesses that still exist and perform financial transactions with my physical gold. "If you deliver me X items, I'll give you Y oz gold". Then I'd find a way to sell those items for other goods and hustle as a merchant. I could not do this as easily with my home, stock holdings, or other "assets".

I have never understood this belief. Why would I give up something useful for a metal that doesn't really do anything for me? I know that throughout history gold was used as currency but I just don't see the usefulness if we did reach a scenario where paper currency is no longer trusted/valued.

I personally have a bunch of ammo for this situation (kind of joking, kind of serious).

1/13/17

At the very least its an IOU. It's collateral on a promise to fulfill the other's side of a trade when there is a time lag within a transaction. It's sort of like structured commodity finance. Essentially all currencies act as this function. You trade a product or service for an IOU that you can then convert back into other products or services in the future. When society's central banking system breaks down, what will act as your IOU? Read "Debt: The Last 5000 Years" for more on this.

"A real entrepreneur is someone who has no safety net underneath them." - Henry Kravis

1/12/17

Buy for the sake of diversification.

1/13/17
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