Can We Value Gold?

Can We Value Gold?

One of the frequent questions people ask me is whether i can 𝐯𝐚𝐥𝐮𝐞 𝐛𝐢𝐭𝐜𝐨𝐢𝐧 when the #cryptocurrencies soared, and now with the correction in stock markets, people ask me to value gold.

𝐃𝐨𝐞𝐬 𝐠𝐨𝐥𝐝 𝐡𝐚𝐯𝐞 𝐚𝐧 𝐢𝐧𝐭𝐫𝐢𝐧𝐬𝐢𝐜 𝐯𝐚𝐥𝐮𝐞?

For an asset to have an intrinsic value, it should exhibit the following characteristics:

1)It should generate cash flows.

2)It should exhibit growth in the cash flows

3)The underlying cash flows have a risk

Thus I can value stocks (dividends), bonds (coupon), businesses (operating cash flows), or even real estate property (rental income) as these have cash flows.

Let us look at gold. If i possess gold, it does not give me cash flows. Thus gold does not have intrinsic value. However, gold has a relative value due to its 𝐮𝐭𝐢𝐥𝐢𝐭𝐲 𝐚𝐧𝐝 𝐬𝐜𝐚𝐫𝐜𝐢𝐭𝐲. Similarly, with its utility and because one can mine limited bitcoins, bitcoin does not have intrinsic value but a relative value.

However, the value of the paper currency (USD or INR) depends on people’s trust in central banks and governments. Unfortunately, the governments and central banks repeatedly betrayed this trust in 2008 (global financial crisis), with sovereign defaults (Sri Lanka, Greece, Brazil, and Argentina) and debasing the currency in high inflation (Venezuela, Pakistan). As investors lose faith in governments, they reallocate their portfolio towards gold as gold is durable.

People assumed cryptocurrencies to function as gold or even replace paper currency. However, as the equities come down, cryptocurrencies plummet, positively correlating with bonds/equities. Thus cryptocurrencies are speculative instruments. It neither serves as a hedge nor a substitute for paper currency.

Thus when 𝐠𝐨𝐥𝐝 𝐩𝐫𝐢𝐜𝐞𝐬 𝐢𝐧𝐜𝐫𝐞𝐚𝐬𝐞, 𝐢𝐭 𝐢𝐬 𝐧𝐨𝐭 𝐛𝐞𝐜𝐚𝐮𝐬𝐞 𝐭𝐡𝐞 𝐯𝐚𝐥𝐮𝐞 𝐨𝐟 𝐭𝐡𝐞 𝐠𝐨𝐥𝐝 𝐢𝐧𝐜𝐫𝐞𝐚𝐬𝐞𝐬 𝐛𝐮𝐭 𝐛𝐞𝐜𝐚𝐮𝐬𝐞 𝐭𝐡𝐞 𝐢𝐧𝐯𝐞𝐬𝐭𝐨𝐫’𝐬 𝐟𝐚𝐢𝐭𝐡 𝐢𝐧 𝐠𝐨𝐯𝐞𝐫𝐧𝐦𝐞𝐧𝐭𝐬/𝐜𝐞𝐧𝐭𝐫𝐚𝐥 𝐛𝐚𝐧𝐤𝐬 𝐡𝐚𝐬 𝐝𝐞𝐜𝐥𝐢𝐧𝐞𝐝.