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Gold vs. Other Commodities Discussion - e-currency

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Old 10-21-2010, 05:19 AM
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Default Gold vs. Other Commodities Discussion

Back to Gold market - The market gets much concern from people all over the world - this time, we will have a discussion on: Gold and Other Commodities with The Bullion Report.

Gold vs. Other Commodities

Gold is often referred to in one of two ways – as a currency or a commodity. This precious metal is not a regular food source, has limited industrial applications, usually produces no interest income, and can run particularly high in price compared to other products. This often begs the question – why invest in gold and not some other commodity? The secret to what makes gold so special lies as much in what it is as it does in what it isn’t.

First and foremost is the overall bias humans have towards gold. For better or for worse, the history of gold laid the foundation for strong feelings towards gold. Many ancients saw the warm, yellow hue of the metal as evidence of a strong link to a sun god. Gold was easier to work than most other metals giving it a likely advantage in terms of popularity for ornaments. It was common enough to be discovered on most continents, but rare enough that only the elite tiers of society or the wealthy seemed to possess it. The years passed and gold became a symbol of something to strive for, and it became a tangible product for exchange.

Gold doesn’t tarnish easily and is less susceptible to corrosion than other metals. This made it ideal for coinage. It wasn’t really hard-wearing, but over time it was easy enough to alloy to other metals to improve that characteristic.

Other products might have appeared as better initial value. Wheat can be made into breads and other food and most grains can be food or planted for food. They have a tangible application that many people might have argued made them more valuable. Cattle and other livestock were likewise able to provide immediate product for consumption or long term food investment. The problem with that assumption of value is two-fold.

Firstly, food products and other commodities normally require a significant amount of maintenance, something that costs money. Gold doesn’t need feeding or care. Keeping livestock is a daily maintenance issue and crops are no less labor intensive. Sure, some forms of gold investment may require fees for storage, but not to the same degree as livestock or food. Secondly, gold cannot rot in storage. It cannot get a fungus like grains can in the fields and be rendered useless. Such commodities also age to their detriment, whereas gold, with its superior physical characteristics, stays relatively unchanged unless some force is acting to erode it, like wind or water.

Other commodities to which gold is often compared include apparent must-have products like oil. Oil provides a means of energy generation and is desirable on a global scale. However, unlike gold, oil is consumed and isn’t recoverable once it reaches its end use. Gold can be re-imagined and reworked. Even gold that has been applied to electronic components can be recovered through chemical or mechanical means. The overwhelming end-use of gold is in non-industrial applications which means that the overall gold supply is dominated by easily recoverable forms of the metal such as bullion or jewelry.

In terms of financial assets, gold cannot be weakened in the same way as some stocks or bonds. There is no underlying company or country from which gold gains value or support. If a company or nation falls on hard times, it can adversely affect any financial asset that is backed by the same. So even though assets of this nature might pay out interest payments or be considered as investments which appreciate over time, they remain susceptible to disaster. So far gold has stood the test of time and been considered a store of value during good periods and bad. In fact, gold was often used as a means of leverage or a financial tool and incentive during times of war or upheaval.

Prices for gold are currently at new high levels. To some investors, this is indicative of the potential for a price bubble or even evidence of volatility which precludes gold from being a viable investment. The same economic and global forces that have moved gold have also created fresh price highs in other commodities and price volatility in other markets. In other words, gold is no more risky than any other asset. Another way to look at it is to think of real estate. Many years ago it would have been unthinkable that property could be an extreme liability. The mortgage meltdown showed the world that it was possible. This kind of risk of loss exists in all investments. However, compared to other markets and investments, gold has shown extreme resiliency and liquidity.
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