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December 13, 2011 / 74

You’ve seen the ads… GOLD!!!

The ads tell you that gold is always valuable (value is a relative term.) They imply that you can’t lose since as one ad puts it, “Gold has never gone to zero!” a claim that I find amusing.

I have been asked by several people if I think that they should buy gold. Since I never give advice that I haven’t already taken (if I can afford to), I tell them no. Then I ask them why they think that they should buy gold? You can’t eat it, you can’t drink it, and it won’t keep you warm in the winter. Why buy gold? But people will do what they will do – and one of the things that people do is buy gold.

Another response as to why buy gold is “because it’s rare and so it’s valuable!”

I can think if several diseases that are rare – but no one accounts them valuable. ;-D

So the issue of “gold is valuable” kick-started my brain into thinking, well, IS gold “valuable”?

It’s shiny. When I bought about 6 boxes of sockets at an auction my wife asked why I bought so many. I could have said “it’s a guy thing” but I didn’t. Instead I said I was buying them because they’re shiny, and I went on to say, “and shiny is good!” So – gold is at least good because it’s shiny.

But is it VALUABLE?

It has some industrial and electronic uses. Some people like to wear it. Gold makes a good tooth filing material.


Yes, and no. If you think it’s valuable, then it is – to you. I don’t think it’s valuable, so it isn’t – to me.

I was discussing this issue with a banker yesterday, and I told him that, valuable or not, it’s probably waaaay over-priced. Then I asked him, “what is the historical ratio of gold to silver in the USA?” He couldn’t tell me. He isn’t the only person I’ve asked that question of lately – and no one has nailed it yet – so I’m going to give y’all the answer and you’re going to kick yourself – because you KNOW the answer.

Back in “the day” – back when specie was used as money, the ratio of gold to silver varied. The ancient Romans had a 1:12 ratio. (1 unit of gold equaled 12 units of silver.) In 1792 the US Official ratio was fixed by law at 1:15. According to a Wiki, the ratio during the 20th century (most of which was after the creation of the Federal Reserve system) averaged 1:47.

In 2009, the ratio was 1:66.3. And at the close today, the ratio was 1:52.9. but although the ratio of gold to silver is an important indicator of value, you must also determine the ratio (price) of gold to whatever currency you’re using.  For example, in 1792 the currency was the US dollar. In 2009, the currency was the Federal Reserve Note – which is a whole lot different thing than the US Dollar.

But the easy way to remember what the approximate ratio of gold to silver used to be is this – during the Westward expansion in the US, the coinage had a $20 gold piece, and a one dollar silver coin. The gold piece was around 90% gold, and the Morgan silver dollar was 90% silver. So we get a clean 1:1 ratio of the metal in the coins. So the ratio was 1:20.

If you divide the price of an ounce of gold by the price of an ounce of silver – you can quickly see that either gold is grossly over-priced, or silver is grossly UNDER priced. With the broad distance between the price of the metals, I’m thinking that either gold HAS to come down, or silver HAS to go up. Either situation makes a case for buying SILVER – but NOT gold.

As to our question – is gold VALUABLE? That would depend on what you can buy with it – value being a different issue than price. As you can see from the above numbers, the value of the US dollar has been plummeting via inflation since the FED was created – so we can no longer express value in terms of US dollars. That being the case,  I would say that gold COSTS a lot, but that doesn’t mean it is valuable.

So, the answer is… without a lot of number crunching – I cannot determine if gold is valuable, and I don’t feel like doing the numbers. ;-D. If you want to try, you can share your results in the comments of this post.


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