Model Portfolio timbo56:SSOF1

In the sense that every object is unique, rareness is quite common. At first it might not seem as if every object is unique, but if we were to measure the surfaces of any object down to the nanometer lever, we would certainly find differences between any given object and every other object in the world. There is a black coffee mug on my desk, apparently the same as the others in its set. But if we were to measure that mug at the nanometer level no doubt the surfaces would undulate differently and have differing microscopic dimples in the glaze. So it is not enough that an object be rare, it is necessary, in order for that rareness to give value to the object, for the object to be rare in a way that makes a difference to an owner.

There are two ways that the differentiating characteristics of an object can boost its value. Either they must yield a utilitarian advantage, or they must be famous. A nuclear power plant is valuable because once it is built electricity can be generated from it using a much less costly stream of fuel than for other power plants that consume fuel. The Mona Lisa is valuable because it is distinct in a famous manner. Let us note that it is so famous that one can just say or write, “The Mona Lisa” without further qualification and virtually every reader more than 10 years old will immediately know what is meant. That is remarkable fame. One might suggest that it is not the fame of the Mona Lisa that makes it valuable, but its beauty. I disagree, because replicas have been created which only an art expert could tell from the original, but they have no value at all, despite being approximately as beautiful. It is fame or utility that makes a rare object valuable.

But for rare objects, there is a real problem of lack of divisibility and fungibility. The Mona Lisa cannot be broken up into pieces without greatly reducing its value. Although it would be silly to discuss the fungibility of a unique object, the class of objects known as “art objects” do have fungibility (a degree of uniformity of value) but hardly any. Each must be valued separately, with no sure way of determining relative values other than holding contemporaneous auctions.

The alert reader will already have gathered that this posting is leading up to the advantages of the precious metals, which are both rare, famous, divisible and fungible, quite a powerful combination for having and keeping value. A quantity of gold can be divided up as much as we might wish. It has complete uniformity of value. Every ounce of gold in the world is worth as much as every other ounce of gold in the world (with the exception of gold formed into a valuable object or existing in a place where there are import restriction on gold). The value is easily determined by just referring to the gold market. Gold is famous. It has been and is the main symbol of wealth in every society I know of. Accordingly, it is no wonder that gold has been used as money for all of recorded history. Technology marches on, but I seriously doubt that the alchemists’ quest of turning lead into gold will ever be achieved.

So the mainstream investment community is foolish to ignore that great potential of gold as the world economy and total world wealth, especially when measured in U.S. dollars, is growing so rapidly. The general dismissal of precious metals as an investment option also opens up the alluring possibility that should the mainstream financial community ever decide that the precious metals could be a good investment, after all, the price will really take off. During the last gold rally, lasting from the beginning of last quarter of 2007 until close to the end of the first quarter of 2008, some mainstream analysts started to say things like, "If you want to invest 5% of your assets in gold, go ahead." Because of their extreme unpopularity as an investment option, precious metals have an immense potential for appreciation. If pension funds were ever to start investing in precious metals, which I certainly believe they should do, then watch out. That would be a gold rally to end all gold rallies.

This scenario is not too far fetched. As gold becomes the best investment one could have made over the past 10 years (it may already be) it will start to gain some credibility as an investment. If it becomes the best 20 year investment, that is credibility. To Wall Street, twenty years means "forever."