I’m sure I will provoke a violent negative reaction but I will say two things about the price of gold:

  • Gold is not investment, it is a pure speculation
  • The fundamental price of gold is unchanged in the last 2000 years

I.e. if you had some ancestors who acquired some gold 2000 years ago and buried it into the ground and now you’ve finally dug it up you will get more or less the same value out of it plus-minus some short-term fluctuations. To get rid of those fluctuations, if you sell an equal fraction of this gold every 10 years at the end of the transaction you will get a 0% profit from your investments over 2000 years.

Which is ridiculous, even a dumb investment into treasury bills will kill gold over time.

So what is the fundamental price of gold?

At the end of the day 100% of the final gold consumption is jewelery. You will say that gold is actually used as money, as treasury reserves and that kind of wealth preservation. This is wrong. This is not different from putting oil into strategic reserves, this is just a temporary preservation of intermediate material for later use. It’s just the fact that this intermediate preservation is so long that it’s fooling you. But at the end of the day there is absolutely nothing else you can do from gold but jewelery.

And the fundamental price of gold is very simple: it is exactly at the level that allows a middle-class income earner to buy two golden rings when he gets married without stressing his budget too much. That was 2000 years ago and it is now.

When the price of gold gets too high against the fundamentals the final consumer is voting with his legs and here’s the proof, as reported by Big Picture:

Luxury goods, excluding jewelry, rose 7.1%. If we include jewelry, the luxury category declined 1.9%

Here we go, the fundamental price of gold is violated, the final consumer is switching from gold to other luxury items. He just doesn’t think that gold is worth the price.

The conclusion is simple: I think that if the consumers across the globe will do what U.S. consumers just did the inflation-adjusted price of gold few years from now will be lower than it is now, maybe even much lower