I DO NOT doubt gold's stature as an almost universal form of store of
value. One incident related to me a long time ago by a friend
underscored this. Almost four decades ago, with the end of the Vietnam War came a small
flood of Vietnamese refugees and some headed for our shores enroute to
one developed country or another willing to accept them. When they
landed here, some were able to purchase provisions to continue their
journey. If they had to pay for purchases with something that was
accepted here, what would that be? Certainly not with Vietnamese
currency. Instead, sewn into the hem of their clothes was gold.
Source from (The Sun Daily): http://www.thesundaily.my/news/53857
Published: November 12, 2012
Its use in as money all through history has been helped along by this
kind of universal acceptance. It does not rust and is thus durable.
And most of all, it was a very good store of value all through history.
So good that the token and fiat money that became more commonly used
eventually had to be pegged to gold so as to buttress their role as
store of value.
More recently, what had been a reasonably good internationally
accepted store of value, the US dollar (and by inference, all national
currencies currently in issue due to the US dollar's stature as the most
important reserve currency against which all currencies are valued) has
become increasingly inept in this role.
Our attempts to earn a reasonable rate of return on the "money" we
accumulate over our life cycle is at least partially a function of our
efforts to earn a rate of return that somewhat if not more than offsets
the worsening performance of money when acting as a store of value.
It has not helped that central banks worldwide have forced the return
on the safer asset classes to almost nothing. I'll say kudos to the
Governor of Bank Negara Malaysia for refusing to join this herd of
central bankers but even the relatively high level she has kept interest
rates here at, does not adequately reflect the time value of money for
many people.
The fallout from relentless central bank manipulation of financial
markets is that interest rates are far removed from what market-clearing
rates would be if free from central bank intervention, and returns from
investing in even relatively risky investments are now proving
inadequate. So, many people seek out investment assets the workings of
which they do fully comprehend in order that their target investment
returns can be met.
One of the more curious developments lately has been a rise in efforts to promote gold as a form of investment.
Some of these involve gold or notional claims on gold. Some are
simply derivatives of financial instruments that are themselves pegged
to the value of gold.
Buying ornamental gold is rarely an investment option. Too much of
the price represents the goldsmith's craftsmanship. Investing more than
a small portion of one's wealth in bullion such as official issue coins
(e.g. Kijang, Maple, Kangaroo, Krugerrand or the Buffalo, Eagle or
Double Eagle) involves much in storage costs.
Other investment alternatives are gold futures, shares in gold mining
companies and gold exchange-traded funds but one of the few options on
the domestic front is gold- or cash-settled gold-linked bank deposit
accounts.
The important thing to note is that gold itself is not money in the
modern monetary system despite common claims to the contrary. There is
not enough gold above ground worldwide to allow it to serve this
function. Its value measured in any currency is determined by the demand
for gold and its supply, just like any commodity. This means the
returns from gold investments measured in the numeraire of currencies
can in fact be quite negative over certain periods of time when demand
gets depressed, and in any case, never the kind of fabulously high, even
fixed monthly returns of the sort promised by dubious investment
schemes.
Factors affecting demand, hence gold price levels include rising
incomes (which boosts demand for ornamental gold), speculative demand,
industrial activities (such as gold drawn wires for use in electronics)
and curiously, demand from central banks (for use as reserves).
Those affecting supply are the pace of production, the cost of
production (a function of technology and also the strength of the
currencies of the major producing nations relative to ours) and central
bank gold sales.
One potential game changing new source of demand is a plan still in
exploratory stages to allow banks to count bullion held as assets
carrying zero risk weights, thus replenishing the stock of AAA-rated
sovereign issues that have become depleted in the past year or two due
to the spate of ratings downgrades.
Pong Teng Siew is head of Inter-Pacific Research Sdn Bhd
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