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LEGO is like Gold!

A mention in another thread got me thinking how LEGO was quite like gold as an "investment". This is a little tongue in cheek obviously, but I do think there are some relevant points.

Carry

Most things we'd regard as investments, such as stocks and bonds pay interest (coupons or dividends). This means that, like everything, they are only worth what someone is prepared to pay, but if you don't like the price you can continue to hold your financial instruments and receive your interest (some equities, of course, don't pay dividends today, because they are investing and growing but equities are a long-term investment and if you hold them long enough they will or the company will go bust).

This link to real future payments filters though to prices today (although there are always supply/demand imbalances) so it is possible to invest in bonds and equities in the short term, relying on what someone is prepared to pay. Equity and bond analysts generate their target or expected prices from the bottom up in terms of those future payments and their probabilities.

Gold is different. Whilst it's been a lovely investment during this financial crisis, that is mostly because of gold's status as a "store of wealth", (a view or belief rather than a link to any real future payments). In fact, gold, like LEGO is an investment with "negative carry", this means if you have costs (storage and insurance) associate with holding it.

This means that the value of gold (and LEGO) as an investment is based much more on what the next investor is prepared to pay than other investments.

Raw and refined form

Gold and LEGO have two sources of value: buying it in raw form (gold bars or MISB sets) and in secondary form taken apart and used for jewellery (and a tiny bit of industry) or for building. Neither of these sources have any real essential application in the outside world (there are other uses of gold in electronics etc. but it's very small compared to, say, copper or silver).

Limited Supply

There is a limited supply of gold and LEGO, which drives its future value. There is only so much gold in the ground, and it can get more expensive to mine. TLG makes a limited number of LEGO sets most of which are opened quickly. Old sets are not, generally, reissued.

Risks

There are two main risks to the value of gold, firstly a change in supply, and secondly a change in attitude or perception.

One of the main risks to gold value would be a sudden change in supply - for instance if a massive new source were found, or producing gold from other materials became possible. With LEGO, the analogy here would be that TLG suddently started reissuing old valuable sets.

The other main risk, would be a change in perception. When prices are rising (as they are for both Gold and LEGO), its easy for everyone to think that prices will keep rising forever. When Gordon Brown sold some of the UK's gold reserves, we were in a time where gold prices had been low and declining for a long time, and there was real talk about the attraction of gold going. It's easy to imagine the the analog for LEGO.

Changing between the two forms

As raw material prices grow and grow, it can become worthwhile to change between the different forms. In the world of gold, this is demonstrated by jewellery values being entirely their raw gold price, and the increase of companies such as "cash for gold". In the LEGO world, what happens when prices go up and up and up, is that it can become interesting and cost-efficient to BrickLink sets from their parts.


Hope you enjoyed that.... Can you think of any other similarities?
Si_UKNZPhoneboothplasmodium

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