Can We Value Gold?

Can We Value Gold?

One of the frequent questions people ask me is whether i can ๐ฏ๐š๐ฅ๐ฎ๐ž ๐›๐ข๐ญ๐œ๐จ๐ข๐ง when the #cryptocurrenciesย soared, and now with the correction in stock markets, people ask me to value gold.

๐ƒ๐จ๐ž๐ฌ ๐ ๐จ๐ฅ๐ ๐ก๐š๐ฏ๐ž ๐š๐ง ๐ข๐ง๐ญ๐ซ๐ข๐ง๐ฌ๐ข๐œ ๐ฏ๐š๐ฅ๐ฎ๐ž?

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 a 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 ๐ฎ๐ญ๐ข๐ฅ๐ข๐ญ๐ฒ ๐š๐ง๐ ๐ฌ๐œ๐š๐ซ๐œ๐ข๐ญ๐ฒ. 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 ๐ ๐จ๐ฅ๐ ๐ฉ๐ซ๐ข๐œ๐ž๐ฌ ๐ข๐ง๐œ๐ซ๐ž๐š๐ฌ๐ž, ๐ข๐ญ ๐ข๐ฌ ๐ง๐จ๐ญ ๐›๐ž๐œ๐š๐ฎ๐ฌ๐ž ๐ญ๐ก๐ž ๐ฏ๐š๐ฅ๐ฎ๐ž ๐จ๐Ÿ ๐ญ๐ก๐ž ๐ ๐จ๐ฅ๐ ๐ข๐ง๐œ๐ซ๐ž๐š๐ฌ๐ž๐ฌ ๐›๐ฎ๐ญ ๐›๐ž๐œ๐š๐ฎ๐ฌ๐ž ๐ญ๐ก๐ž ๐ข๐ง๐ฏ๐ž๐ฌ๐ญ๐จ๐ซ’๐ฌ ๐Ÿ๐š๐ข๐ญ๐ก ๐ข๐ง ๐ ๐จ๐ฏ๐ž๐ซ๐ง๐ฆ๐ž๐ง๐ญ๐ฌ/๐œ๐ž๐ง๐ญ๐ซ๐š๐ฅ ๐›๐š๐ง๐ค๐ฌ ๐ก๐š๐ฌ ๐๐ž๐œ๐ฅ๐ข๐ง๐ž๐.



1 Comment

  • […] does not have an intrinsic value but a relative value like gold. Cryptocurrencies like bitcoin are an alternative to financial assets (paper currencies) due to durability and scarcity (only […]

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