Why on earth would anyone buy gold. What can you do with it and just Why really?

WTF?_2

LEPRECHAUNS ARE STEALING OUR GOLD, CLAIMS DARLING

http://www.thedailymash.co.uk/news/business/leprechauns-are-stealing-our-gold%2c-claims-darling-200810021296/

CHANCELLOR Alistair Darling last night warned UK banks could collapse after a series of daring raids by hordes of 'little people'.
..
Darling said: "They're about four inches high and are dressed in a fine tunic and breeks, a pair of shiny boots and a tall hat."They carry a little purse filled with magic dust and can make themselves invisible, which is of course illegal under European competition rules."
..
But Declan O'Flaherty, Chief Gold Keeper of the Kilkenny Little People, said: "Come now, give us yer gold. I've picked out a beeotiful, magical tree with an AER of 4.5%.

rl290

Max_Headroom wrote: »

So basically gold has value because it has value. And because it's "pretty".

So its value is purely based on sentiment really. What other people think/are prepared to pay defines what is its worth, there is no usefulness or income ratio to it.

Sounds a lot like the house price bubble to me, values based on no more than opinion rather than actual usefulness/cost ratio, right up until the point where people realise the emporer has no clothes.

I think your reasoning is the wrong way round...

Originally, gold WAS currency - coins were made out of the precious metal and gold measures were used to pay for goods. Why? Because of all the reasons that !!!!!! laid out.

Over time, instead of carrying gold, people instead carried pieces of paper which laid claim to gold held in a bank. If you read a banknote, it will still say that "I promise to pay the bearer of this note the sum of..." - meaning that you could take the banknote to the bank and get the real value item (i.e. the gold) out with it.

However, a problem now emerges. What stops you just printing more money? Not wanting to bore you with the historical background, the answer is nothing really. But why is it that paper money has devalued so quickly? My Dad still tells me how a pound used to be a lot of money, but now I lose them down the back of the sofa! The reason is that as you print more money, the money becomes less valuable - there is more of it, and yet there is less gold backing the money.

The converse would be to say that, as you print more money, the value of gold goes up. (But this really is the backwards way to think about it - it's the value of money going down and not the value of gold going up). Therefore, gold is a good hedge to inflation, as well as having all the other value traits that !!!!!! says.

Of course, gold is no longer directly linked to banknotes. But, it's place as a store of money is exactly the same, and for all the same reasons. People around the world will recognise the value of a gold sovereign - that's why James Bond is given a pack before his earlier missions. As governments print more money (look at Zimbabwe, or even this potential $700bn rescue plan), gold will always be a safe haven.

FYI, I personally hold c.5% of my wealth in gold, and am considering buying on drops.

TDS_2

Max_Headroom wrote: »

Absolutely, understand all of that. And not suggesting the buying gold is a bad idea (recently it appears to have been a very good idea).

However the fact remains that its value is still simply a matter of mass opinion, rather than anything tangible like a related income from it or other way of earnings.

Like house prices...?

Gangstabird

!!!!!!? wrote: »

Basically, Gold has been used as a medium of currency in almost all the major civilisations for thousands of years.

It has a number of properties which make it suitable as a store of wealth:

* There's only a limited amount in the world and new gold is being mined at a relatively low rate, so it's not 'inflating' away and is relatively rare.
* It's inert - doesn't tarnish or corrode. Great for longer term storage. You can even chuck it into a hole in your garden - try that with paper notes.
* Because of the rarity it means you can store a lot of wealth in a very compact form. This is where silver falls down, another precious metal. A small brick of gold would be worth as much as a suitcase full of paper notes.
* There aren't many practical uses (main one would be jewelry) so it's not like the available gold is being consumed. Even when it's used for something like jewelry it's almost 100% retrievable to ingot.
* It's physically attractive and pleasing to the eye.
* Because of the long history of gold, it's universally accepted as being precious.

That's why gold has value.

From a financial point of view it makes sense to hold some gold as it's a good hedge against inflation. ie. You can put your money into gold and the value will be preserved because as the currency devalues, the price of gold will rise to compensate. Also, unlike bank credit, it isn't going to go '!!!!!!' along with the bank that's holding your savings account. - so in troubled times when people are worried about losing their life savings it's very attractive to have some.

Beware - the gold market is subject to massive volatility (it has swung between $750 and over $1000 per troy oz in 9 months). Like property, if you buy in at the wrong time you are going to get burned.

Also, unless you are the gambling sort, it's a good idea to limit your exposure to a small amount like 10% of your savings to act as a hedge. That way if strong inflation hits you have the gold to provide some compensation. If we don't get inflation then the gold may lose paper-money value - but your other holdings should balance that out. (Old saying: Put 10% of your net worth into gold and pray it never pays off).

The thing that worries me is that now mainstream media are carrying stories about it and lots of people are thinking about getting into gold. That's normally the time to get out of a financial product (old anecdote about the shoe shine boy giving stock advice springs to mind.....) :think: Sure enough, gold has fallen quote a bit in the last few days after surging on Monday.....

Thank you for explaining. I am not trying to advise anyone I just wondered why you would buy something that you can't eat/watch/use for anything:rotfl:

El_Pirate

Max_Headroom wrote: »

So basically gold has value because it has value. And because it's "pretty".

So its value is purely based on sentiment really. What other people think/are prepared to pay defines what is its worth, there is no usefulness or income ratio to it.

Sounds a lot like the house price bubble to me, values based on no more than opinion rather than actual usefulness/cost ratio, right up until the point where people realise the emporer has no clothes.

You're right that all values are subjective and everything is worth what you can exchange it for.

The fact is though that value of gold has been perceived pretty much the same way for all of human history. This is to do with human nature rather than gold though.

purch

First Government to issue Official Paper Currency.....Yuan Dynasty China 1260.

First Government to realise Official Paper Currency=Inflation=Worthless Currency....Yuan Dynasty China 1272.

Max_Headroom_3

rl290 wrote: »

I think your reasoning is the wrong way round...

Originally, gold WAS currency - coins were made out of the precious metal and gold measures were used to pay for goods. Why? Because of all the reasons that !!!!!! laid out.

Over time, instead of carrying gold, people instead carried pieces of paper which laid claim to gold held in a bank. If you read a banknote, it will still say that "I promise to pay the bearer of this note the sum of..." - meaning that you could take the banknote to the bank and get the real value item (i.e. the gold) out with it.

However, a problem now emerges. What stops you just printing more money? Not wanting to bore you with the historical background, the answer is nothing really. But why is it that paper money has devalued so quickly? My Dad still tells me how a pound used to be a lot of money, but now I lose them down the back of the sofa! The reason is that as you print more money, the money becomes less valuable - there is more of it, and yet there is less gold backing the money.

The converse would be to say that, as you print more money, the value of gold goes up. (But this really is the backwards way to think about it - it's the value of money going down and not the value of gold going up). Therefore, gold is a good hedge to inflation, as well as having all the other value traits that !!!!!! says.

Of course, gold is no longer directly linked to banknotes. But, it's place as a store of money is exactly the same, and for all the same reasons. People around the world will recognise the value of a gold sovereign - that's why James Bond is given a pack before his earlier missions. As governments print more money (look at Zimbabwe, or even this potential $700bn rescue plan), gold will always be a safe haven.

FYI, I personally hold c.5% of my wealth in gold, and am considering buying on drops.

That is a fantastic explanation and I thank you for it, it clears up a lot.

However we still come back to this:

Of course, gold is no longer directly linked to banknotes. But, it's place as a store of money is exactly the same, and for all the same reasons. People around the world will recognise the value of a gold sovereign -

And that's the thing. Gold has a value based purely upon what the perceived value is. As an extreme example, should people ever come to the conclusion that gold has no actual value, then it's entirely possible (in theory at least) that the value could fall to zero.

Max_Headroom_3

El_Pirate wrote: »

You're right that all values are subjective and everything is worth what you can exchange it for.

The fact is though that value of gold has been perceived pretty much the same way for all of human history. This is to do with human nature rather than gold though.

Precisely.

Bit like houses became worth what you could exchange them for, divorced from the realities of affordibility, rental income, cost to build etc. It held up for a while as people were prepared to pay these divorced prices on the basis that it would be worth even more in a week/month/year. The moment that sentiment was widely proved wrong, prices immediately went into freefall. And that's for something necessary and useful and which you can see, touch and feel, and can provide a tangible income.

Many peoples gold is no more than a promise from a company that apparently has it. They can't see it, they can't touch it, they can't earn from it and they can't use it for anything.

Apply some logic to it and it appears that the only thing holding up gold prices is historical value. A bit like house prices were.

Realy

Max_Headroom wrote: »

Apply some logic to it and it appears that the only thing holding up gold prices is historical value. A bit like house prices were.

One thing could be because of its Electrical conductivity, but should optics take over it would lose some value as it would not be needed for that purpose.
If it losses all of its uses it would be valueless other than looking nice (but I dont like yellow gold anyway)

StevieJ

amcluesent wrote: »

>I mean it's not like you can eat it or cook with it or do anything with it. Why??????<

LOL. Another MSEer on the ignore list...

What a strange comment in response to a perfectly reasonable question.