Gold Aversion

[vexed87]

On the other hand, how is gold not like tulips?

I can grow tulips in my garden/greenhouse with very little energy, gold on the other hand requires significant energy input to mine and all the easy/high yield ore is long since mined, unless gold price rockets wildy (relative to the cost of extraction/production), most of the remaining ore will stay buried forever, in a similar manner to how the tail end of our fossil fuels will not be economical to extract, the energy invested is not necessarily worth the energy (or profit) returned.

[ThisDinosaur]

The apparently stable value of gold over centuries is noteworthy, yes. Essentially, I'm now facing the conundrum that anything I invest in is essentially tulips. Like, the main criticism I had for gold at the beginning of this debate now applies to everything I could conceivably invest in (save MAYBE farmland.) It's all just shared narratives.

Just read the synopsis for "Sapiens." What's the gist of the argument that agriculture "started as a promise of luxury but, ended up making people's life worse?"

[jacob]

Lets make a distinction between price and value. Price is what you pay. Value is what you get. While some theories posit that value=price at all times in order to simplify the math, not all theories make this presumption.

[bryan]

@ThisDinosaur, so did you find the Wikipedia page on the subjective theory of value?

Lets make a distinction between price and value. Price is what you pay. Value is what you get. While some theories posit that value=price at all times in order to simplify the math, not all theories make this presumption.

though, gold (or currency, generally) is probably a decent candidate for EMH to be actually correct (huge volume, huge market, lots of arbitrage). Except apparently some believe banks via financial instruments/mechanisms have the power to distort the price of gold (e.g. other commodities, though gold is value dense so it can be more easily physically held/stored, if that's important).

[ThisDinosaur]

I knew I should have made the price/value difference more explicit. Price is what you pay. Value is what you get.

Price, however is typically determined by what a population of customers is likely to pay, or to the cost of supplying the product.
A good value could be defined as buying lower than it cost to produce, or buying lower than a thing typically costs.

But, if its cheap to produce tulips, and I can get my hands on them for half the normal price, did I get a good deal if I paid a year's salary for them?My post above where I appear to conflate the two was about the fact that "what you get" in value is largely subjective. A shared narrative. A hypothetical comparison. For investing purposes, the only thing that matters is if you've bought lower than you expect others to pay in the future.

What other models/frameworks of value are there? Getting very meta now; how does one determine if something is truly "valuable?"

[bryan]

What other models/frameworks of value are there? Getting very meta now; how does one determine if something is truly "valuable?"

Looks like we cross-posted..

> @ThisDinosaur, so did you find the Wikipedia page on the subjective theory of value?

bottom of that wiki page links to some other theories. SVT is the foundation of Marginalism afaik.

edit: isn't it interesting that we have another definition of "value" which is something along the lines of principles/ethics/morals?

[ThisDinosaur]

@bryan
No, I came up with the subjective theory of value all by myself! Actually, the idea I was trying to articulate was that, even though stocks *produce things, so they're better than gold*, the things they produce are not, in fact, better than gold. That's the leap of logic I had yet to make.

[ThisDinosaur]

So, the bottom of that wiki page leads to the following theories of value:

Subjective, marginal utility, intrinsic, labor, and power.

We've been discussing subjective.
Marginal utility is the idea that a thing drops in value to an individual who has more of it than they would use (consistent with rare=valuable).
Intrinsic is self evident.
Labor lines up with what I said above about cost to produce.
Last is power theory of value.

This one is new to me. It says price is determined by monopoly, which is determined by private ownership. I think this means that value is determined by enforced scarcity of supply. Soooo...invest in government contractors?
Not sure I get the concept, but investing in government contractors makes sense because inflated dollars are paid to those firms first by the government; before market wide prices have a chance to adjust to the increased supply of dollars.

[BRUTE]

that's called the Cantillon Effect, brute believes. brute highly advises ThisDinosaur to read Human Action, all this stuff is in there.

intrinsic and labor theories of value work for some special cases, but are easily demonstrated to fail in other cases (diamond/water in the desert paradox). afabk, subjective theory of value hasn't yet been "broken", even though power/monopolies are maybe a special case to them that some Austrian economists address, for example Rothbard in Power & Market.

brute also believes subjective/marginal are not different. at least brute seems to remember that marginal utility is clearly explained in Human Action and other works that utilize subjective theory of value. the reduced utility of an additional marginal item is part of what makes a subjective value judgement.

[JL13]

I think one important thing to think about. If it takes over 3 pages of discussion for you to get comfortable with it being worth anything, then will you be able to actually hold onto it when it's value is crashing in your portfolio?

That's the main reason I don't have any. I know that I don't feel 100% confident enough in it's value (and my decision to own it) that I could watch it fall 50% and not react.

[ThisDinosaur]

@JL13 Investor know thyself. I completely agree that if you don't believe in your strategy, you risk bailing at the worst time. That's why I started the thread. I want to be sure I'm totally on board before I commit.

I have been known to change my mind with new information and well reasoned arguments. And, if convinced, I intend to only use gold in a component of the permanent portfolio, which is ostensibly designed to let three quarters of it's assets fail the majority of the time. And the pp only as one part of my total portfolio.

[tylerrr]

@JL13 Investor know thyself. I completely agree that if you don't believe in your strategy, you risk bailing at the worst time. That's why I started the thread. I want to be sure I'm totally on board before I commit.

I have been known to change my mind with new information and well reasoned arguments. And, if convinced, I intend to only use gold in a component of the permanent portfolio, which is ostensibly designed to let three quarters of it's assets fail the majority of the time. And the pp only as one part of my total portfolio.

As usual, the human factor usually costs the average investor when prices crash. This is why many people flee the PP ETF and mutual fund when the stock market is booming so they can try to chase the market. Then, when the stock market crashes, a bunch of people go back into the PP ETF and mutual fund. All the while, they usually end up with losses. Funny how that works.

I guess I love a 4 part PP because I've always gravitated towards being a contrarian investor so it fits my investing mentality most of the time. Plus, I love the decreased volatility of a PP as I get older.

So far, I've broke about exactly even on my Gold portion of the PP. I've bought into it at several different price ranges while always balancing the 4 parts equally.