~ Un-Common Sense In An Irrational World: We Challenge the Conventional WisdomTM ~
Why Would You Buy Gold!!!??? (That’s A Rhetorical Question)
Why would you buy gold? A better question is: How much is gold worth? On Thursday, you might have said $5,318.40 a troy ounce. On Friday, you might have said $4,713.90 a troy ounce, an 11.37% DROP in price from Thursday to Friday. That was the largest one-day dollar decline in the price of gold since January 1980. By the way, silver prices declined 31% on Friday (their biggest decline since March 1980).
So, I ask again – how much is gold worth? It’s not $5,318.40 or $4,713.90 – those are gold’s prices. The answer is: I don’t know, you don’t know, no one knows! You cannot determine how much gold is worth. It all has to do with a concept known as intrinsic value. According to Investopedia, “Intrinsic Value is a measure of what an asset is worth that is arrived at by means of an objective calculation or complex financial model, rather than using the currently trading market price of that asset.” Such calculations and financial models often use cash flows in the calculations. But gold, silver, and other non-financial assets don’t have cash flows. Accordingly, you can’t calculate an intrinsic value, or “worth”, of the asset. And when you can’t calculate its worth, or intrinsic value, you don’t know if the price you’re are paying for the asset is too much (overvalued), too little (undervalued), or just right (a fair price). Without the ability to make this determination, you are just speculating on the purchase. Will it go up, down, or stay the same? You have no reasonable basis to make that judgement.
How has gold performed as an investment over time. According to Jeremy Siegel, a renowned economist and Professor Emeritus of Finance at the Wharton School of the University of Pennsylvania: “Despite outpacing inflation, the yellow metal offers little additional returns. Whatever hedging property gold possesses, its long-term returns fall far behind stocks and will likely exert a considerable drag on the return of a long-term investor’s portfolio” [Siegel, Jeremy (2023). Stocks for the Long Run, 6th ed. P27]. Siegel has some very interesting charts and discussion on this topic in his book, Stocks for the Long Run.
Why did the price of gold increase to over $5,000 in recent weeks? According to the Wall Street Journal (1-22-26), there are five reasons: (1) debasement trade; (2) lower interest rates; (3) central-bank buying; (4) expensive stocks; and (5) momentum. Why did gold crash to $4,713.90 on Friday? According to the Wall Street Journal (1-31-26/2-1-26), it was due to the U.S. dollar posting a strong recovery in price after Trump confirmed Kevin Warsh as his pick to lead the Federal Reserve; and profit-taking by Wall Street traders. One analyst commented, according to the Wall Street Journal article: “The short answer is I have no idea. Nobody knows.” This last comment highlights the extremely tenuous nature of predicting, analyzing, and commenting on asset prices that are based on after-the-fact analysis and sheer speculation, not some objective measure like intrinsic value. What will gold close at today, or next week, or next year? The truthful answer: I have no idea! That’s why I’m investing in stocks and other assets where I can determine an intrinsic value.
A final question is this: should you buy gold? You have to make that determination for yourself. But, consider these two things: (1) you cannot determine an intrinsic value for gold to help judge whether the price of gold is undervalued, overvalued, or fairly priced; and (2) gold’s investment performance has lagged that of stocks over time.
