Price vs Value – Will Gold Hit $3460?

PRICE VS VALUE

Can you explain the difference between price and value? Most investors can’t. Neither can most analysts. A few years ago, some people were caught up in the NFT (non-fungtable token) craze. Try explaining price and value as it applies to that former “next big thing”.

NFTs were part of the virtual reality sickness the seized upon investors and others, causing them to spend money for something that had little or no real value. Price volatility for the imaginary items, however, seemed to imply that owning a piece of the action was imperative. You didn’t need to be a creator of master level art in order to participate, either. The investor war cry was “buy and accumulate”; and they did. Special online sites for facilitating the creation of caricatures that resembled Lego Monkeys (among other obviously valuable subjects and genres) also provided a marketplace where buyers and sellers could exchange their wares and get rich. As the sickness worsened, prices rose out of sight exponentially.

Day-trading in stocks became passé. Collectors of NFTs tried valiantly to articulate the ‘value’ of these works of art by referring to them as “unique” and “one-of-a-kind”. Upon purchase and transfer, the new owner received certification that the piece was original and genuine. It could be part of a series and that notification was also included. No one else was authorized to display or show that particular token. Sometimes there might be a physical item attached to your purchase, and, ownership of that transferred as well. After watching a host of videos that tried to explain various aspects (creation, selling, collecting, etc.) of the virtual disease, I concluded that imagination and fantasy had become more valuable than reality. I laughingly tried my hand at it  and wrote an article about it (see Having Some Fun With NFTs). What is/was the value of an NFT? The website folded sometime afterwards as the sun set on the NFT craze.

DO CRYPTOCURRENCIES HAVE VALUE?

Not exactly. There is value, however, which is not vested in the individual token (Bitcoin, Ethereum, XRP, etc).

The primary fundamental value of all cryptocurrencies stems from the basic characteristic that is universal to cryptocurrencies. That characteristic is block chain technology which allows decentralized and private transfer of money between and among participants (buyers and sellers, investors, etc.). In other words, the value lies in the process, which happens absent a central clearing authority.

One of the most laughable, and outlandish, claims about Bitcoin, is that it is a store of value. There is absolutely no evidence that Bitcoin is a store of value. Whether the price is $100,000 or $1, nothing has changed other than its price. Its value lies in the private transfer of money, not the bitcoin itself. (see Bitcoin Has No Value; Neither Does Ethereum, XRP, Etc.)

THE VALUE OF GOLD

Fascination with the price of gold has investors expecting continually higher prices. Analysts and marketers alike chime in with all of the fundamental reasons to expect more of the same.

Gold’s value, however, is unrelated to its price. The value of gold lies in its use as money. As such, gold’s value is the same today as it has been historically for several thousand years.

A higher price for gold does not tell us anything about gold. Gold’s higher price over time is a reflection of the loss of purchasing power in the U.S. dollar.

The U.S. dollar has lost approximately 75% of its purchasing power since 1980. What this means is that it costs about four times as much today for comparable goods and services as it did in 1980.

In order for the gold price to fully reflect the loss in USD purchasing power, it would need to be $3460 oz. today. As it is, gold is priced at $3045 oz.; more than $400 oz. cheaper than its inflation-adjusted high in 1980.

CONCLUSION 

Will gold reach $3460? It’s possible. A 14% surge from here would do it. What happens afterwards is open to speculation.

In the past, the gold price has declined significantly for long periods of time after approaching its previous inflation-adjusted peaks. This happened in 1980, 2011, and again in 2020. Let’s see what happens this time.