Buying Gold at $975

Here's my analysis on gold as a buy right now.

Unless something of value is protected by intellectual or property rights, it is generally fungible, liquid and tradeable. There is usually a way to transform object of value A into object of value B, for example gold into food or diamonds into oil. Most such objects can trace their value to the physics of energy: how much energy it takes to transform, produce, harvest, or seek out this object from the world at large.

Unlike DVDs, trading cards, and dollars, it's not easy to make more gold. We're making progress with hydrogen fusion research, but no science we have currently allows us to transform something not gold into gold; the only current way to do it is via supernovae.

So all new gold must be found either in space or in the earth.

Most of the easy gold, lying in stream beds in California, Alaska, or elsewhere, has been plucked out and monetized anywhere from hundreds to thousands of years ago. So has much of the shallow earth gold. Most of the gold mines are pushing new technological limits of digging deeper and smarter to retrieve ever smaller amounts of gold. There are gold deposits with less gold per kilo of rock available, which would require more energy to retrieve a given amount of gold than from other sources. Another possible method to retrieve gold would be to atomically separate it from sea water, but there is no current process able to do so.

So there is a relation between energy expended and new gold found/mined. The amount of gold entering the system is X% percent of current levels, a small amount. This makes gold an ideal non-inflationary metric.

Gold in and of itself does have some value. It is used in electronics manufacturing, and is also used as adornment as jewelry. A barrel of oil however has a directly transformable value. We can use it as energy for anything for transportation to heating, and as a raw material for a host of manufactured items. So the value of gold is less intrinsically fixed than oil is.

Gold however, has some properties superior to oil. It is reasonably rare. It does not degrade or tarnish. It is dense, meaning little space is required for its storage or its transport. And it is malleable and ductile, making it easily stretched, beaten, or molded into arbitrary shapes. All of these make it ideal as a substitute for other things of value, as a currency. And indeed that has been one of its primary uses over the millenia.

One can argue that any given currency has a greater chance to fail as a medium of exchange than gold, merely by the fact that its tied to the existence of its issuing country. So there is a trust that gold will retain its value as a currency, enhanced by the properties enumerated in the previous paragraph.

A number of analyses have been done on the state of the global economy in general and the US in particular. A number of facts are pertinent.

The US government has been printing money at an increasing pace to combat issues of liquidity in the economy.
The federal deficit has been growing to an ever greater percent of GDP.
The dollar has been falling to record lows when measured against either other currencies or against general commodities.
The total trade deficit will increase to over 4 trillion dollars, and 800 million this year.
There has been increased demand (and competition) for commodities as the global economy expands.
The price of most commodities experieced a global recession from 1980 to 2000 as prices were depressed relative to global growth and inflationary measure.


Both the US stock markets and the US bond markets are expected to either trend negative or experience very slow increase in value relative to currency and inflationary forces.

If you believe that the pressures on the dollar will keep it low, the stock and bond markets will be down, and consumption of commodities will continue upwards, you should buy gold. I believe it, like most commodities are undervalued relative to their future value.