How do you measure the value of gold?
"Gold may have some ""intrinsic value"" but it cannot be accurately determined by investors by any known valuation techniques. In fact, if you were to apply the dividend discount model of John Burr Williams - a variation of which is the basis of Discounted Cash Flow (DCF) analysis and the basis of most valuation techniques - gold would have zero intrinsic value because it produces no cash flow. Legendary focus investor Warren Buffett argues that investing in gold is pure speculation because of the reason mentioned above. As others have mentioned, gold prices are affected by supply and demand, but the bigger influence on the price of gold is how the economy is. Gold is seen as a store of value because, according to some, it does not ""lose value"" unlike paper currency during inflation. In inflationary times, demand increases so gold prices do go up, which is why gold behaves similar to a commodity but has far less uses.  It is difficult to argue whether or not gold gains or loses value because we can't determine the intrinsic value of gold, and anyone who attempts to justify any given price is pulling blinders over your eyes. It is indisputable that, over history, gold represents wealth and that in the past century and the last decade, gold prices rise in inflationary conditions as people dump dollars for gold, and it has fallen when the purchasing power of currency increases. Many investors have talked about a ""gold bubble"" by arguing that gold prices are inflated because of inflation and the Fed's money policy and that once interest rates rise, the money supply will contract and gold will fall, but again, nobody can say with any reasonable accuracy what the fair value of gold at any given point is.  This article on seeking alpha: http://seekingalpha.com/article/112794-the-intrinsic-value-of-gold gives a quick overview, but it is also vague because gold can't be accurately priced.  I wouldn't say that gold has zero intrinsic value because gold is not a business so traditional models are inappropriate, but I would say that gold *certainly * doesn't have a value of $1,500 and it's propped so high only because of investor expectation.  In conclusion, I do not believe you can accurately state whether gold is undervalued or overvalued - you must make judgments based on what you think about the future of the market and of monetary policy, but there are too many variables to be accurate consistently." "There are three aspects of what to value gold over. It doesn't easily chemically react with anything, so it stays pure over a long period of time (vs, say a bar of iron or a bar of butter).  So it's valuable so far as it doesn't rot. It is shiny, and there is the historical allure of having a bag of shiny, jingly gold coins. Other people will give you other items of perceived value in exchange for it. I believe it was Warren Buffett who stated his opinion on gold - paraphrased such: ""You pay people to dig it out of the ground, you pay people to purify it and pour into forms, you pay people to verify the number of nine's purity in it, you pay people to build a secure building to store it in, and you pay people to stand around and guard it.  Where is the value in that?""" "Intrinsic value is a myth.  There is no such thing.  Subjective human demand is the only thing that gives anything value.  This subjectivity is different person to person and can change very quickly. Historically there are two main uses for gold: jewelry and money.  How can you tell when a particular type of money is undervalued?  It disappears from circulation since people prefer to use money that is overvalued.  This phenomenon is paraphrased in Gresham's Law: Bad money drives out good money. The Coinage Act of 1792 established the US dollar as 371.25 grains of silver or 24.75 grains of gold.  This established a government ratio of 15 ounces of silver to 1 ounce of gold.  In the late 18th century there was a large production of silver from Mexico and the market ratio of silver to gold increased to 15.75 to 1 by 1805.  The government ratio, however, was still 15 to 1.  This was enough incentive for people to exchange their silver coins for gold coins at the government ratio, melt the gold, and sell the gold bullion overseas at the market value.  Thus, gold coins disappeared from circulation as people either hoarded the gold or sent it abroad.  People used the overvalued silver coins (i.e. the ""bad"" money) domestically and gold coins disappeared from the market. In an attempt to correct the problem of disappearing gold coins the Coinage Act of 1834 was enacted.  It kept the US dollar at 371.25 grains of silver but changed the definition to 23.2 grains of gold which established a government ratio of 16 to 1.  This was close to the market ratio of gold to silver at the time so both gold and silver coins appeared in circulation again.  The gold rush of 1849 produced a lot of gold and the market ratio of silver to gold became 15.46 to 1.  Now gold was overvalued so people began exchanging their gold coins for silver coins at the government ratio, melt the silver, and sell the silver bullion overseas at the market value.  People used the overvalued gold coins (i.e. the ""bad"" money) domestically and silver coins disappeared from the market. When you see gold circulating everywhere you will know it is overvalued compared to other types of money.  Paper money always drives gold out of circulation since the market ratio of paper to gold severely under values gold. Source here." "1) Get some gold. 2) Walk around, yelling, ""Hey, I have some gold, who wants to buy it?"" 3) Once you have enough interested parties, hold an auction and see who will give you the most dollars for it. 4) Trade the gold for that many dollars. 5) You have just measured the value of your gold." "I can describe the method for determining a price floor, which may help. It starts with looking at the cost of mining. There's a ridiculously small amount of gold in the best ore, so it's measured in tonnes of ore to produce a given ounce of gold. Mines will only operate at a loss for so long, so for any mine which focuses on gold, when the price of gold is below that price for long enough, the mine will cease operation. Since not all mines have the same cost, the supply will not appear as a step function, it will reduce slowly as mines close.  ""Gold Drops Below Cash Cost, Approaches Marginal Production Costs"" offers a marginal cost of production just over $1100. This is not a floor price, as the market can act irrationally at times. It's just a number to consider.  On the demand side, the industrial use (I am thinking gold plating in electronics manufacturing) will serve to provide demand almost regardless of price. When a $100 microprocessor uses say 10 cents worth of gold (at $300/oz) $1500 gold increases the final chip price by 1/2%. The industry is still trying to move away from Gold where they can, but that's a long process.  As far as a ceiling goes, I highly recommend the book Extraordinary Popular Delusions & the Madness of Crowds which offers insight on a number of mania that have occurred not just in the past few decades, but over the centuries. At $1500/oz, the value of all the gold in the world is about US$7.5trillion (That's 12 zeros). Given that a portion of it is in jewelry and not available as an investment, it's safe to say that the entire world can only easily bid on about 1/3 of this (as the gold council cites 31% of gold going towards investments each year vs 57% jewelry and 11% industrial) or US$2.5T or so. With total world wealth at US$125T it would take a bit more hysteria to push gold from its current 2% of that value (funny how that number lined up perfectly) to much higher.  Note: I provided a number of links, as it's too easy to just throw numbers around. See the links and provide more current data if you're so inclined. Data isn't real time." You acquire something because you expect to use it, or because you expect to exchange it for something that you want to use. Gold is a good candidate for storing value because it's rare, it's not easily counterfeited, it's divisible, it's portable, etc.  Contrast this with your favorite currency:  more can be printed up almost at will, etc. Overvaluedness/undervaluedness is only in reference to something else.  How many dollars does it take to buy an ounce of gold?  (About $1,500.)  How many ounces does it take to equal the DJIA?  (About 8.)  How many ounces of silver does it take to buy an ounce of gold?  How many barrels of oil can you buy with an ounce of gold?  Etc., etc. But whatever measure you're using, the value of the gold you have is directly related to the mass of gold you own.  Two ounces are twice as valuable as one ounce. As the old joke goes (no offense to taxi drivers intended!) when your cabbie starts talking about how to get rich with gold, it's probably overvalued.  Sell it all! ;) There is no such thing as intrinsic value. Gold has value because it is rare and has a market. If any of those things decline, the value plunges. The question of whether gold is overvalued or not is complicated and depends on a lot of factors.  The key question in my mind is: Is gold more valuable in terms of US dollars because it is becoming more valuable, or because the value of US dollars, the prevailing medium of exchange, is declining? "We measure the value of gold by comparing it to other things. Sorry, but there is no better answer than that. There is no gold standard (pun intended) by which objects can be measured in value because ""value"" is a subjective term. It would be comparable to asking how funny is an object. Different objects are funny to different people. Even if we gathered all the really ""funny"" object together, there is no guaranty those objects would be funny next year - unless we all agreed they were as part of a social contract. Which is basically what we do with currency. While gold does not need a social contract in order for it to retain its value, this is only because it is has been (1) very useful and (2) rare. If either of these two factors change, the value of gold will change - which it has on several occasions. WARRING: Rant about ""Intrinsic Value"" of gold below. Gold has no ""intrinsic"" value. None whatsoever.  ""Intrinsic value"" makes just as much sense as a ""cat dog"" animal. ""Dog"" and ""cat"" are referring to two mutually exclusive animals, therefore a ""cat dog"" is a nonsensical term. Intrinsic Value: ""The actual value of a company or an asset based on an underlying perception of its true value ..."" Intrinsic value is perceived, which means it is worth whatever you, or a group of people, think it is. Intrinsic value has nothing, I repeat, absolutely nothing, to do with reality.  The most obvious example of this is the purchase of a copy-right. You are assigning an intrinsic value to a copy-right by purchasing it. However, when you purchase a copy-right you are not buying ink on a page, you are purchasing an idea. Someone's imaginings that, for all intensive purposes, doesn't even exist in reality! By definition, things that do not exist do not have ""intrinsic"" properties - because things that don't exist, don't have any natural properties at all. ""Intrinsic"" according to Websters Dictionary:  ""Belonging to the essential nature or constitution of a thing ... (the intrinsic brightness of a star)."" An intrinsic property of an object is something we know that exists because it is a natural property of that object. Suns emit light, we know this because we can measure the light coming from it. It is not subjective. ""Intrinsic Value"" by definition is the OPPOSITE of ""Intrinsic"""
"The biggest risk you have when a country defaults on its currency is a major devaluation of the currency. Since the EURO is a fiat currency, like almost all developed nations, its ""promise"" comes from the expectation that its union and system will endure. The EURO is a basket of countries and as such could probably handle bailing out countries or possibly letting some default on their sovereign debt without killing the EURO itself. A similar reality happens in the United States with some level of regularity with state and municipal debt being considered riskier than Federal debt (it isn't uncommon for cities to default). The biggest reason the EURO will probably lose a LOT of value initially is if any nation defaults there isn't a track record as to how the EU member body will respond. Will some countries attempt to break out of the EU? If the member countries fracture then the EURO collapses rendering any and all EURO notes useless. It is that political stability that underlies the value of the EURO. If you are seriously concerned about the risk of a falling EURO and its long term stability then you'd do best buying a hedge currency or devising a basket of hedge currencies to diversify risk. Many will recommend you buy Gold or other precious metals, but I think the idea is silly at best. It is not only hard to buy precious metals at a ""fair"" value it is even harder to sell them at a fair value. Whatever currency you hold needs to be able to be used in transactions with ease. Doesn't do you any good having $20K in gold coins and no one willing to buy them (as the seller at the store will usually want currency and not gold coins). If you want to go the easy route you can follow the same line of reasoning Central Banks do. Buy USD and hold it. It is probably the world's safest currency to hold over a long period of time. Current US policy is inflationary so that won't help you gain value, but that depends on how the EU responds to a sovereign debt crisis; if one matures." "First of all, congratulations on saving some money. So many people these days do not even get that far. As far as investments, what is best for you depends heavily on your: Here is a quick summary of types of assets that are likely available to you, and my thoughts on why they may or may not be a good fit for your situation. Cash Equivalents Cash Equivalents are highly liquid, meaning you can get cash for them on fairly short notice. In particular, Money Markets and Certificates of Deposit (CDs) are also considered very safe when issued by a bank, as they are often insured against loss by the government up to a certain amount (this varies quite a lot by country within Europe, see the Wikipedia article here for additional detail. Please note that in the case of a CD, you are usually unable to get access to your money for the length of the investment period, which is usually a short period of time such as 3 months, 6 months, or 1 year. This is a good choice if you may need your money back on short notice, and your main goal is to preserve your principal. However, the returns tend to be very low and often do not keep pace with inflation, meaning that over several years, you may lose ""real"" purchasing power, even if you don't lose nominal value in your account. Special Note on Cash Equivalents If the money you want to invest is also your Emergency Fund, or you do not have an Emergency Fund, I would highly recommend Cash Equivalents. They will provide the highest level of Liquidity along with a short Time Horizon so that you can get your money as needed in the case of unforeseen expenses such as if your car breaks down. Debt Debt investments include government and corporate bonds. They are still considered relatively safe, as the issuer would need to default (usually this means they are in bankruptcy) in order for you not to be paid back. For example, German bonds have been considered safer than Greek bonds recently based on the underlying strength of the government. Unlike Cash Equivalents, these are not guaranteed against loss, which means that if the issuer defaults, you could lose up to 100% of your investment. Bonds have several new features you will need to consider. One is interest rate risk. One reason bonds perform better than cash equivalents is that you are taking on the risk that if interest rates rise, the fixed payments the bond promises will be worth less, and the face value of your bond will fall. While most bonds are still very Liquid, this means that if you need to sell the bond before it matures, you could lose money. As mentioned earlier, some bonds are riskier than others. Given that you are looking for a low-risk investment, you would want to select a bond that is considered ""invesment grade"" rather than a riskier ""junk"" bond. Debt investments are a good choice if you can afford to do without this money for a few years, and you want to balance safety with somewhat better returns than Cash Equivalents. Again though, I would not recommend investing in Debt until you have also built up a separate Emergency Fund. If you do choose to invest in bonds, I recommend that you diversify your risks by investing in a bond fund, rather than in just one company's or government's debt. This will reduce the likelihood that you will experience a catastrophic loss. Ownership Ownership assets includes stocks and other assets such as real estate and precious metals such as gold. While these investments can have high returns, in your situation I would strongly recommend that you not invest in these types of investments, for the following reasons: For these reasons, debt is considered a safer investment than equity for any particular company, government, or the market as a whole. Ownership assets are a good choice for people who have a high Risk Tolerance, long Time Horizon, low Liquidity needs, and will not be bothered by larger potential changes in the value of the investment at any given time. Special Note on Gold I would consider Gold a very risky investment and not a good fit for you at the moment based on what you've shared in your question. Gold is considered ""safe"" in the sense that people believe that if the economy goes into recession, depression, or collapses entirely, gold will continue to be valuable. In a post-apocalyptic world where paper money became worthless, it is still a good bet that gold will always be considered valuable within human society as a store of value. That being said, the price of gold fluctuates almost entirely based on how bad people think things are going to get. Think about the difference between gold and a company like Coca-Cola. Would you like to own 100% of Coca-Cola? Of course, because you know there is a very good chance that people will continue to spend money all over the world on their products. On the other hand, gold itself produces no products, no sales, no profits, and no cash flow. As such, if you buy gold, you are really making a speculative bet that gold will be in higher demand tomorrow than it is today. You are buying an asset (the gold) rather than part of a company's equity or debt that is designed to throw off payments to its investors in the form of bond payments or dividends. So, if people decide next year that things are improving, it is possible that gold could lose value, given that gold prices are at historically high levels. Gold could be a good choice for someone who has a large, well-diversified investment portfolio, and who is looking for a hedge to protect against inflation and other risks that they have taken on via their other investments. I hope that is helpful - best of luck in your choices. Let us know what you decide!" &gt;how can one argue plastic's inability to store value comes artificially/by opinion?  That's backwards. Gold's *ability* to store value is artificial. Plastic's value is naturally determined by the market. It's cheap to produce, and abundant. Therefore, the market dictates it's going to be cheap.  Gold is artificially priced because it still retains many of its characteristics as a store of value for things unrelated to itself. People, for example invest in gold bullion, driving up the price. It's abundant, though costly to produce; yet its quantity and cost of production don't determine its price. Investors do.  You don't see people investing in plastic bars. No matter how promising the gold market is, investing in gold bars still has risks. For this reason, before you buy gold bars, make sure you have carefully studied the ins and outs of this investment. Know where, when, why and how to buy gold bar assets. Know the common pitfalls of investing in gold bars and do all that you can to avoid them. For reporting purposes, I would treat the purchase and sale of gold like a purchase and sale of a stock. The place to do so is Schedule D. (And if it's the wrong form, but you reported it, there is might not be a penalty, whereas there is a penalty for NOT reporting.) The long term gain would be at capital gains rates. The short term gain would be at ordinary income rates. And if you have two coins bought at two different times, you get to choose which one to report (as long as you report the OTHER one when you sell the second coin). The points given by DumbCoder are very valid. Diversifying portfolio is always a good idea. Including Metals is also a good idea. Investing in single metal though may not be a good idea.   •Silver is pretty cheap now, hopefully it will be for a while. •Silver is undervalued compared to gold. World reserve ratio is around 1 to 11, while price is around 1 to 60. Both the above are iffy statements. Cheap is relative term ... there are quite a few metals more cheaper than Silver [Copper for example]. Undervalued doesn't make sense. Its a quesiton of demand and supply. Today Industrial use of Silver is more widespread, and its predecting future what would happen. If you are saying Silver will appreciate more than other metals, it again depends on country and time period. There are times when even metals like Copper have given more returns than Silver and Gold. There is also Platinum to consider. In my opinion quite a bit of stuff is put in undervalued ... i.e. comparing reserve ratio to price in absolute isn't right comparing it over relative years is right. What the ratio says is for every 11 gms of silver, there is 1 gm of Gold and the price of this 1 gm is 60 times more than silver. True. And nobody tell is the demand of Silver 60 times more than Gold or 11 times more than Gold. i.e. the consumption. What is also not told is the cost to extract the 11 gms of silver is less than cost of 1 gm of Gold. So the cheapness you are thinking is  not 100% true. Too calculate these values, information contained in the company's financial statements (income, balance, or cashflow) will be needed along with the price.  Google finance does not maintain this information for BME.  You will need to find another source for this information or analyze another another symbol's financial section (BAC for example). That's a very interesting article, and something that I hadn't considered, but I have a hard time believing that the value of the dollar is really 1/4 of what it was just 15 years ago. Ounces of gold don't appreciate in ounces of gold, and you can't buy anything with them. Like it or now, gold isn't used as a currency, so its price at this time is primarily dictated by how much more that people expect its value to rise in USD.