Value, Price and Time

Value and price is not the same thing.

Value is what we subjectively think that something is worth. Price is what we have to pay in order to get it.

Only things that we value higher than its price should be worthy of our money. However, making a good judgement of value is sometimes extremely difficult.

Especially big things, complex things and abstract things are hard to value. As a result, it's easy to pay way more for something than it turns out to be worth with the benefit of hindsight.

Making it all even more difficult is the fact that money itself has become an abstraction. It used to be directly convertible to gold. Nowadays it is something fleeting that looses purchasing power over time.

However, everything can be made easier by translating it into time. We can adopt a time standard for ourselves and make judgments based on that. Our time can again be translated into gold, which then serves as a monetary standard for our lives.

From an earlier post, we got that 1 day of work should equal about 4 grams of gold. A house should equal about 2400 grams of gold.

By this standard, both gold and houses are a little expensive compared to what the typical middle class salary is in Portugal. However, relative to salaries in Norway, gold is reasonable while houses are expensive.

Other places, a nice little house may cost less than 2400 grams, making them cheap if salaries are at 4 grams per day.

The ultimate yardstick is time.

By linking time to gold and to a house, we get a way to judge the relative price of gold and houses. However, absolute prices can only be calculated from time. But since time isn't an asset class, we cannot invest in it. We can only invest in whatever we deem cheapest relative to other asset classes.

The fact that just about everything is expensive these days relative to our time does not help. We have to place our savings somewhere.

Outside of gold and houses, there is cash, shares and bonds.

Cash may do well for a while in an environment where everything looks expansive. However, cash these days is funny money. It is created out of thin air. It is linked to debt. It is complex and unpredictable, heavily manipulated by central bankers. Gold is therefore preferable for the long term.

Bonds and shares should yield about 6% in direct dividend to be of interest. This should be in addition to price inflation. At present, we're below 0% when taking price increases on food and energy into account.

The only reason bonds and shares have done so well over the last ten years or so is that interest rates have been manipulated lower by central bankers. Based on direct yield, shares and bonds are terrible investments.

Cash, gold and real estate are therefore preferable to stocks and bonds, especially in this late stage of the current business cycle.

However, there are no cheap assets. The average person has to work extra long hours these days to gather enough savings to go off with a pension in the future, regardless of which asset class is chosen.

Labor is in other words cheap. Everything else is expensive.

This situation is not likely to last for much longer, though. Too many people have left the work force. Labor is becoming scarce. Prices for skilled labor cannot stay suppressed for much longer.

When the price of labor goes up, all assets will fall relative to it. However, the assets that are closest to their fair value are likely to do relatively better. It will be bond prices that will go down the most, followed by share prices.

In such a situation, it is best to get out of cash, since this is likely to become excessively manipulated by central banks, panicking. Gold on the other hand, cannot be manipulated to the same extent by central banks.

The price of gold is ultimately set by the average middle class person buying jewelry. It is the ultimate money for this reason. Everyone values it. The price will therefore always lay somewhere between 1 and 5 gram for a day of skilled labor. As the price of skilled labor rises, so will the price of gold.