Wednesday, May 4, 2011
Gold and Aluminum
Gold is valuable because we think it is valuable. At one time, we thought aluminum was more valuable than Gold!
Before the turn of the last Century, Aluminum was thought to be more precious than Gold - or even Platinum! Napoleon III dined off of aluminum flatware, while his lesser contemporaries made due with Gold or Platinum table service. Only the Emperor could afford Aluminum!
When the Washington Monument was completed, the builders wanted to cap it with the largest piece of the most precious metal they could think of - so they chose Aluminum. It cost a fortune!
Today? You throw an aluminum can away and think nothing of it. One aluminum can, back in 1830 would have likely made you a Millionaire!
The sudden change in the value of aluminum took place when much cheaper means of refining the ore became available. Suddenly, Aluminum was disposable - as in aluminum foil. From most expensive thing in the world, to garbage, overnight.
The idea that aluminum was valuable is what changed, and it changed suddenly, as the supply of the metal increased dramatically.
Today, we may see a similar thing happen to Gold - not on the level of Aluminum, of course. You won't be drinking your Pepsi out of a Gold Can anytime soon. The ore is rare enough. But not as rare as the gold bugs want you to think.
As I noted in another posting, the cost of production of Gold, according to one mine, is about $450 an ounce. So the idea that it is worth $1500 an ounce is, well, a bit overstated. And as more and more people melt down old jewelry, the supply will increase. Old mines in the US, Canada, China, and Latin America, are all being opened up again. A second "gold rush" is taking place.
And what is driving scarcity this time around is that people are hoarding gold. So the amount of available gold on the market is small - people aren't selling because they think it will get more and more valuable over time.
But, all it will take is some small event to trigger one or two people to say, "Maybe I should sell my hoard of gold" and when they do, prices will drop. Not a lot, but a little. And then the supply would have increased as that hoard is now on the market. And that would trigger another person to sell, thinking, "Gee the price is dropping, I should sell now before it falls further".
And so on. In electronics, we call it the avalanche effect. And once it takes on a life of its own, it will keep going - to perhaps beyond the point where prices should stabilize.
Investing in Gold is investing in the idea that Gold is valuable. Investing in Stocks is investing in the profitability of the company - a numerical value that can be calculated and tracked and paid back in dividends.
Investing in the idea of something's worth is usually a really bad idea - unless there is some other chump who comes along who will pay even more than you. Such schemes usually deflate when the chump market dries up, though.
We always run out of chumps, it seems, no matter how fast our Nation's school system churns them out!