From The Motley Fool:
I’m not surprised people are flummoxed over how to value gold – it’s fairly complex – but saying it can’t be valued is presumptive without deep knowledge of the subject.
What people and even the WSJ miss is they start their valuation with gold and its price, a strategy akin to predicting how high a corn stalk will grow by looking at the seed. Sun, water, and nutrients determine how high corn will grow. Likewise for gold. Gold’s price is the effect, the result, not the cause. Other forces drive gold’s price including its supply, amount of dollars are outstanding, popularity of equities, bonds, cash, real estate, confidence in government & authorities, confidence in the economy, & many other factors. We must examine these forces to value gold.
It’s obvious there are no cash flows to ground a traditional valuation, but that doesn’t mean gold has no value. Even cursory thoughts on gold or other commodities would come to that conclusion. With knowledge of the future anything can be valued, gold included. The question is how well we can forecast the future. And based on analysis of the drivers above, I believe we can determine a range of prices for gold – both an anchor price and a range of likely future prices. [full story]Value is always relative. Gold, for example, has some value as a product. As a product, one can calculate what a "fair market value" might be at any time based on demand, supply, and the cost of extracting, refining, and reshaping it. Then there is the emotional value... the premium assigned to the price of gold because it is seen as a "safe haven" for wealth. That's where all of the ads for Gold! come in. When the economy is booming and people are trying to acquire bigger homes, bigger boats, bigger cars, bigger diamonds, more exotic vacations, etc.; the demand... and price... of gold is rather mundane... more along the lines of a cost-plus pricing.
So, suppose all of the economy-Armageddon stories have some truth to them. The value of currency is going to fall so the prices of everything are going to rise dramatically. Today will seem like full-employment. People will be on the streets and lawlessness will abound. Gold!
But, if food and fuel and shelter are scarce, will someone be willing to swap those things for a bar of metal? That presumes that the bar of metal can be used to obtain those other scarce essentials. Gold may be on the list of things that some survivalists want to have... after a hefty supply of those other essentials and a good supply of guns and ammunition.
Here is one alternative to Gold! if you really believe that everything is "going to hell in a handbasket."
Of course, if world economies improve, then you won't be seeing all of those ads for Gold! because the price will fall dramatically... just as it did in the 1980s.