Stop buying gold people. Gold is not the world's hard currency. It is not a permanent store of value, in fact it is one of the most speculative, and crooked markets out there.
The only true world currencies are fossil fuels, fresh water, and trust. Now when I say trust I don't mean it in an ABC family special sort of way. I mean it in a credit rating type of way. For instance, many people do not Trust that Greece will give them back the money they borrow from them, therefore, their trust currency is worth very little and creditors ask for arms, legs and other things to compensate them for the risk of not getting their money back. In places like Argentina a few years ago people did not Trust that the paper money they held would be honored by their grocer and therefore it became worth very little (a la hyper-inflation).
We know that people will need to consume energy, and therefore, there will always be a market for fossil fuels (sorry to people who think we can live in a world of solar powered cars). And there is a growing and alarming limit on the amounts of accessible and potable (read, drinkable) water in the world. Investing in companies that provide this may prove a wise move in the long term...just sayin.
Which brings us back to gold. Gold is used for earrings, necklaces, rings, coins, small amounts in fighter plane windshields, and the big bars you would find in Fort Knox...nothing else. (I am sure that if more people read this I could get challenged on this point by numerous other uses, but they don't so I'm not worried) Other than that it is something pretty that only became popular as a currency because of its malleability. They could make it into bars and coins easier than things like iron and bronze. (That's why you see pirates bite the coins they barter with, to see it leaves a mark.)
Bottom line, gold is a terrible investment. 1) There is no way to determine a fair-value on something that has no practical use. 2) At $1200 an ounce, however, I am almost ready to raid my wife's jewelry box (if the people buying it at the "Gold Stores" weren't all crooks) 3) You can tell when asset has hit the bubble stage when you start seeing EVERYONE trying to get in on it. I dont know about everyone else, but I listen to the radio and hear fifteen commercials about Buy Gold Now! Sell us your Unwanted Gold! Does anyone remember shows like Flip This House, and commercials to buy houses with NO MONEY DOWN. I think we all know how that story ended. I cant say that gold prices will plummet tomorrow, hell, they could double if a state or two in the US start issuing IOU's. What I am saying is that buying gold is like buying Beanie Babies in the 90's. Your kinda rollin' the dice.
Do like my buddy John and put down for a house. That is something with a practical purpose and real demand.
First of all, congratulations on launching the blog. It looks good and is very well written.
ReplyDeleteI do have to disagree with part of your commentary on gold. Gold IS a permanent store of value, in that it has always been valued throughout human existance. That is highly unlikely to ever change. One unique reason for this, and also why it is valued for jewelry, is that gold does not corrode and is difficult to break down chemically. That is definately an essential characteristic for a long-term store of value. Central banks around the world are the largest holders of gold, and they do so because at this international level, gold is viewed as a hard asset. The British treasury thought they were smart a few years ago and liquidated their gold holdings when gold was at it's lowest point. (oops)
Ten years ago, I bought gold and I will remain happy with that decision whether it goes to $2000 or drops to $700. Like all investments, it rises, falls and sometimes develops into a "bubble". That definately happened in 1980, and could happen again, although there is no comparison between the movements of the gold price in 2010 to that of 1980. The price of gold will remain elevated (over $1000) for as long as there is an elevated risk of inflation. Many "gold bugs" cloud their arguments for gold as an investment with hype and claim that in the coming post-economic-apocolypse the only people who will be able to buy anything are the ones who own gold. Not the most academic argument, in my opinion.
So why buy gold? History has shown that during periods of inflation, the only way to hold on to wealth is to be invested in hard assets and that could be anything from real estate to precious metals to lumber or Craftsman hand wrenches. Gold has the advantage of being very portable (try putting $1000 worth of wrenches in your pocket) and having established world market prices (thus making it easy for two parties to agree on a fair value). Like all investments, there is a day to buy and a day to sell. I won't be selling until the U.S. has a balanced budget or until the Fed interest rate rises, which in post-Bretton-Woods U.S. history has signaled a steep and persistent decline in precious metals.
First off, thank you for your excellent response. I'm always happy to hear an intelligent counter-point. That being said...
ReplyDeleteI am not trying to argue that gold is not an asset. While I may have misspoken in so much as finding a fair value is easy, there is no way to tell where a base-value could be. Unlike a share of stock which can be measured against the share of earnings that it represents from the issuing company, or a piece of Real-Estate which can use its projected After-Tax Cash Flow; gold is a market where the tightly controlled supply out on the open market (i.e. the amount not locked away in central bank basements) can artificially stoke or cool demand for it.
The gold-bugs you mention would be very upset indeed if they found themselves in a post-apocalyptic world, where if they tried to trade gold for food or guns they would be supremely disappointed.
While I do agree that perceived value does equal real value, the fact is that perceptions can be very fickle. If one hedge-fund manager (say, John Paulson maybe) decided to unload a mass of gold holdings into the market, not only would that inflate the supply (thereby lowering effective demand) but it would also signal to other investors that maybe its time to start selling. Which also lends to the fact that while it might not have been a great exercise in market timing, the British Empires decision to diversify away from their gold holdings may also have been part of the reason it had to do so at historically low prices.
A run on price of gold is just as possible as a run on technology stocks or Chinese commercial property. The permanent store of value effect holds up only until large investors and collectors find a more productive asset to pile into; which in the next inflationary cycle may be numerous other asset classes that are tied to that inflation.
All that being said, you are the one who bought gold 10 years ago and I cannot argue with the results. After all a 300%+ gain is more than a slight bit better than a flat stock market.