Gold: The Original Bit-Coin By: Gabriel PotterMBA, AIFA® 2014.03.18

Let’s continue from our previous blog post on Bitcoin and ways to compete with government sponsored money.  The classic value store is, of course, gold.

We usually have CNBC chatting quietly on our office television throughout the day, reporting on world news and market events.  I looked up from my computer the other day and saw Rick Harrison – the reality TV star for the show “Pawn Stars” - giving his expert analysis on the price of gold.  I admit that my immediate reaction was a little snobbish.  Rick Harrison is a reality TV player with a pawn shop in Las Vegas.  He isn’t an economist or market analyst, so why is he giving expert advice? 

Gold’s price has gone through a roller coaster over the past several years.  Gold has been used as a proxy bet against economic growth, a safe haven, a hedge against inflation, a hedge against deflation, a small scale medium of exchange, and a way to retain value in the feared aftermath of a predicted financial-apocalypse.  These factors affect demand, and therefore price, despite the fact that the consumption of gold (for jewelry, electronics) has been stable.

Quoting Gold-Resource, most of the gold around is used for jewelry (45%) and investments (another 45%).  The primary uses and demands for gold are based on the whims of the gold-buying public.  Most investors don’t need an electronic engineering degree to figure out how much gold they’ll need for a specific type of electronic circuit-board.   You don’t need to be a financial analyst because gold is still just a metal.  It doesn’t make earnings, it doesn’t have an income statement and it doesn’t make a profit.  It simply sits there, either as a ring on a finger or as a bar in a bank vault.  The demand of gold is almost purely psychological.  The supply of gold is largely determined by demand; if the price goes up, it becomes more economical to grind-down rocks and smelt the gold out of them.

The more I think about it, the better qualified Rick Harrison seems.  Question:  what determines the price of gold?  Answer:  what people pay for it.  Who knows that better than a pawn shop owner?

Gabriel Potter

Gabriel is a Senior Investment Research Associate at Westminster Consulting, where he is responsible for designing strategic asset allocations and conducts proprietary market research.

An avid writer, Gabriel manages the firm’s blog and has been published in the Journal of Compensation and Benefits,...

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