Gold vs. Oil

[Paul Ellis]

One thing I can't work out about the run up to $1100 or so for Gold is that it is supported (supposedly) by countries diversifying out of USD.

If I was a country with, say, $50 billion or so to spend on commodities to reduce my USD weighting, I can either buy -

1. Gold - can be used to make jewellery or gold bars to put under your bed

2. Energy - can be used to power the nation, wars are fought over it, drives economic growth (running factories, making plastics etc), is forecast to run out at some time in the future

I can't for the life of me work out why you would poor sovereign wealth into gold?? At the very least you would stockpile copper or nickel which has value to the economy I would have thought

Maybe I am oversimplifying - keen to hear if there is something I have missed. The only argument I have heard is that it is an inflation hedge (wouldnt oil be the same?) or that the amount of gold/new mines each year is declining.

 

[skyQuake]

One thing I can't work out about the run up to $1100 or so for Gold is that it is supported (supposedly) by countries diversifying out of USD.

If I was a country with, say, $50 billion or so to spend on commodities to reduce my USD weighting, I can either buy -

1. Gold - can be used to make jewellery or gold bars to put under your bed

2. Energy - can be used to power the nation, wars are fought over it, drives economic growth (running factories, making plastics etc), is forecast to run out at some time in the future

I can't for the life of me work out why you would poor sovereign wealth into gold?? At the very least you would stockpile copper or nickel which has value to the economy I would have thought

Maybe I am oversimplifying - keen to hear if there is something I have missed. The only argument I have heard is that it is an inflation hedge (wouldnt oil be the same?) or that the amount of gold/new mines each year is declining.

Because its a trusted store of wealth.
In postwar hyperinflation germany. The gold silver ratio ballooned out to 100:1 and more. Why? Cause gold was easier to carry and store.

You can have 500 tonnes of copper sitting around or you could get a some gold bullion. Copper is also far more leveraged to the econ cycle (same for oil). Also someone can easily detonate your oil so you gotta spend even more money on security...

 

[Smurf1976]

I could store $1 million worth of gold easily in a cupboard and could easily move it should I wish to trade it for something else. It won't degrade, burn, corrode or have anything else happen to it - the only real risk is theft.

On the other hand, $1 million (USD) buys 12,500 barrels of oil or nearly 2 million litres. Yes that can certainly fit in a tank, but not one that I can easily hide or have safely in a normal commercial or residential area. It's at constant risk of leaks, fires and so on and I'll need a fleet of tanker trucks to move it should I wish to relocate the oil or sell it.

Same goes for most other bulk commodities. I could't fit enough coal, for example, on my entire block to be worth $1 million but as I said, I could stash that amount of gold just about anywhere and unlike the coal, it doesn't pose a major hazard to store it. Gold is simply a more practical means of exchange than other materials and, since it is scarce, performs the monetary role with minimal inflation of available volume over time.

 

[Ageo]

Once gold is bought in bullion form it really never has to be transformed for people to acquire it. Unlike oil, that needs to be refined to be made into petrol, copper needs to be made into materials for people to use (pipelines etc...) and the list goes on.

As others have mentioned you can store billions of gold in a smallish area and sell it off as is if you need to.

Handy when times become very volatile.

And sometimes its not about making money on everything but actually preserving the value of something in times of chaos.

A smart man would have both gold & oil at his disposal thow

 

[joeyr46]

At the end of the day if you have the gold you can buy the oil or whatever else is needed

 

[Paul Ellis]

thanks for all the replies!

I understand what you are saying but I guess my basic issue is gold as a fungible commodity (ie - like a proxy for currency/cash). I can understand the inherent value of oil, nickel, copper etc - and I can understand the value of gold in medieval times as a proxy for currency...but I can't understand why it is still a currency proxy today...I would have thought a country could use sovereign wealth on GDP influencing commodities such as oil and get a multiplier effect rather than a passive commodity such as gold...

here is a hypothetical to explain what I mean - what would happen if some medical breakthrough proved that gold had some previously unknown negative effect on health - and as a consequence everybody had to stop wearing gold jewellery - would gold still remain as a currency proxy?

 

[Paul Ellis]

let me also be clear that I am not trying to talk down gold (I hold SBM shares and get in & out of LGL) - I am just baffled as to the value of gold and the drivers behind it...

 

[explod]

let me also be clear that I am not trying to talk down gold (I hold SBM shares and get in & out of LGL) - I am just baffled as to the value of gold and the drivers behind it...

Google the "history of Gold" and also get onto the website "The Privateer" who has a good story on gold history. 20 or 30 minutes ought to give you a fair perspective

Many advisers these days will recommend usually up to around 15% of gold of gold stocks in a ballanced portfolio.

 

[So_Cynical]

let me also be clear that I am not trying to talk down gold (I hold SBM shares and get in & out of LGL) - I am just baffled as to the value of gold and the drivers behind it...

Alot of people would argue the following...Paul to understand Gold u have to look at it as a currency not a commodity.

 

[Ageo]

Alot of people would argue the following...Paul to understand Gold u have to look at it as a currency not a commodity.

Thats correct because its the only form of commodity thats classed as a currency aswell (in todays times).

Its always good to have some rare money stashed somewhere. P.S i would and still do take gold as form of payment before anything (even fiat money).

Gold is a universal currency that everyone wants, and if everyone likes it that means it has value.

 

[WilliamKong]

One thing I can't work out about the run up to $1100 or so for Gold is that it is supported (supposedly) by countries diversifying out of USD.

If I was a country with, say, $50 billion or so to spend on commodities to reduce my USD weighting, I can either buy -

1. Gold - can be used to make jewellery or gold bars to put under your bed

2. Energy - can be used to power the nation, wars are fought over it, drives economic growth (running factories, making plastics etc), is forecast to run out at some time in the future

I can't for the life of me work out why you would poor sovereign wealth into gold?? At the very least you would stockpile copper or nickel which has value to the economy I would have thought

Maybe I am oversimplifying - keen to hear if there is something I have missed. The only argument I have heard is that it is an inflation hedge (wouldnt oil be the same?) or that the amount of gold/new mines each year is declining.

The recent fundemental drivers for gold price can be summariese as follows:
1. India bought 200 tons of gold from IMF, which can be seen as a bullish factor, or an indicator that some central banks may buy gold in the future to hedge a decline value in the USD.
2. A gold mining company called Barratt Mining was dehedging their gold contract, which they bought back a few million ounces of gold from the market.
3. Some option traders are trying to hedge their position. Now for the November option contracts, there are about 13,000 option contracts on $1100 level and 29,000 options (1.3 million + 2.9 million ounces if gold price closed above $1200 level) on the $1,200 level.

All these activities contribute to the higher price of gold. However, it is interesting to see how gold will perform after 23rd of Nov (expiry date of Nov contracts).