On Gold and Intrinsic Value

One argument one hears about why you should not invest in gold is because it has no intrinsic value, i.e. gold cannot be valued based on future cash flows.

And that is true.  Gold has no intrinsic value.

My retort is … so what?

We humans are funny beings.  We have innate preferences for things that may or may not be rational. 

What is the value of a diamond?  Diamonds are purchased primarily as gifts for women.  There is no cash flow from diamonds.  Yet every year, men across the world spend several thousand dollars on a refined rock as a tokens to demonstrate their worthiness for marriage.  Try telling your bride-to-be “I was going to propose to you with a diamond, but a diamond has no intrinsic value as it does not throw off cash flow.  So instead, I spent the $5000 on a waste-hauling stock with a 6% yield.  Will you marry me?”  See how that works.

Likewise, why do we insist on spending so much money on homes with a view?  What is the intrinsic value of over-looking a lake, an ocean or a mountain?  Lakes, oceans and mountains do not generate cash flow.  We pay a lot of money for a view because we like the views.

There are many things in which we humans engage that have no intrinsic value but amuse and entertain us nonetheless – sports, movies, the opera, sailing, horrible reality TV shows (that describes all of them – ed.)  There is nothing “intrinsic” about going to watch a hockey game, a play or a concert.  The value is pleasure derived from the activity itself.

What is the value of a sporting event?  There is no cash flow that derives from attending a sporting event if you are buying the ticket.  Yet, tell the sports fan that the ticket has no value.  Experienced scalpers can make good money ascertaining the supply and demand dynamics for sporting events. 

It is no different for gold.  There are properties that make gold desirable as a currency – it is extremely durable for example.  However, the reason why we value gold is because it is shiny and pretty.  It has the same intangible to humans as diamonds or football tickets or the condo with a view overlooking the bay. 

Similarly, there is no such tangible thing as a “dollar.”  A “dollar” is an intangible unit that we humans have ascribed a value of exchange.  Yes, there are bonds denominated in dollars, but those bonds are backed by cash flow.  The $1 trillion in Federal Reserve notes outstanding, i.e. “dollars,” generate exactly $0 in cash flows.  Yet, they have value to us because we believe they have value.

Gold is the same.  There is no cash flow that derives from gold, but gold has an intangible value that we humans desire, and the price for gold is determined by supply and demand.

Simple as that.

I am long gold.


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