Watching this year's price action alone, more
commentators say gold holds no investment value...
WHY GOLD? Human beings love to debate, but sadly sometimes it crosses a line
and turns argumentative, write Miguel Perez-Santalla and Adrian Ash at BullionVault.
That's what is happening right now with the debate
over gold investing.
There have been several high-profile articles, most
recently in the Wall Street Journal, saying you should
eliminate gold as a worthwhile part of your
investment portfolio. Why? Primarily because of this year's lower price.
Against that idea, many bloggers and private
investors, wondering why gold has fallen in price, say that it shouldn't have
dropped. There must be some conspiracy driving down prices when
money-printing and our still-weak economy should be driving it higher. But
that still puts current price performance front and center in the debate over
why gold should or shouldn't feature in your portfolio. So it misses several
key points about why gold is uniquely valuable as an investable asset.
We'd like to look here at some of the common
arguments now offered for why gold should not figure in your investment
strategy. Yes, working at BullionVault, the physical gold and silver exchange, we're biased. But there are
also people who always say gold doesn't warrant your investment dollars.
To have any intelligent understanding of your own
position, you need to welcome debate. That way you can challenge your own
opinions and, if you find they're correct, improve your arguments too. Such
as why gold investing continues – in our view – to warrant investors' attention.
#1. Gold Does Not Yield Anything
When you buy any commodity outright you can no
longer deposit it with a bank or investment company to earn interest. If you
are looking to yield a dividend or interest then physical gold ownership will
not yield anything. Yet that is only half the story.
Gold ownership yields security for the investor, the
type of security a person seeks from insurance. It is the only physical form
of insurance which both exists to counterweight your investments in bonds and
stocks, and which is also a liquid, easily traded asset. Gold is also
non-correlated with those more "mainstream" markets. Meaning that
its price moves indepedently of where other investment prices are heading. So
the goal for most investors in holding gold is first as a safety
net for their other assets.
This metal has held value for thousands of years, and will hold value for
thousands more.
#2. Gold Is Worth Only What the
Next Investor Will Pay for It
This statement is weak from the onset. There are no
stocks, bonds, commodities or goods that are worth more than the next person
will pay. That being said gold has something that the others do not. Gold is
100% transparent.
Why? Gold is unlike other easily traded investments
because it is only one thing, a pure and precious rare commodity which
requires little space for storing great value. This commodity has acted as
money for thousands of years. In fact after World War II, the Bretton
Woods agreement used gold to bring brought stability and
sanity to the world's currency markets once more.
If that history of human use doesn't give intrinsic value
to gold, why would you give that title to any other asset? People had their
life savings in Lehman Brothers stock. Other people invested in
mortgage-backed securities or were holding Argentine
bonds or got sold the claims of Bernard L. Madoff Investment Securities LLC.
Though data may tell a story it does not always tell
the whole truth. Stocks and bonds, though there are many facts available
about them, are never 100% transparent. It is much like a hiring a baseball
player. You may have his statistics and you may place him in the perfect spot
on the best team in the league. Yet he may perform poorly due to an unknown
injury or a problem with the change of venue or any other number of unknown
reasons. This is the same for stocks and bonds. Though we have their
statistics, we never know when some problem may cause some of these
instruments to fail.
#3. Gold Is Not a Good Hedge for
Stocks, Nor Inflation
Anyone looking at the 1980s and '90s and concluding
that gold is a
poor inflation hedge misses the point. You
didn't need an inflation
hedge when cash-in-the-bank paid 5% above and beyond the
rate of inflation each year, as it did on average for US and UK savers for
the last twenty years of the 20th century.
But why doesn't gold make a good hedge for stock
market investments? The frequent comparison is usually to
the stock market overall, or the Dow Jones Industrial
Average. Never mind that gold and stocks have, over extended periods, gone in opposite directions. That measure is not a just number to use. Because the stock
indexes frequently change. This is also true of the overall
market where stocks are delisted if they underperform or go bankrupt. If
these types of stocks were kept on how would the indexes and averages have
changed? The stock market of 1989 did not have the same listed companies as
that of 1996, 2000 or 2013.
In contrast, the gold of 1989 was the same gold of
1996, 2013 and even 2000 BC. Gold does not change and its supply cannot be
expanded (or reduced) at will. This is why gold functions so well as a form
of exchange and transfer of value. It holds value due to its permanent
unchangeable form. World history has shown us again and again that in the
final analysis; only gold out of all investable assets holds value in
catastrophic situations.
You can lose value owning gold if you buy high and
sell lower, but you never lose it all. You could easily pick out a point in
any chart of the stock market where an investor could have bought and then
another time where you may have sold and lost money. There is no point to
this kind of example. Because it never speaks to an individual's overall
performance with their assets. They may have liquidated their stock at the
low price because they needed the cash to invest in a particular business or
real estate opportunity. All assets including gold have to be looked upon as
part of a strategy for the investor and not as independent pieces of life's
asset management puzzle.
#4. Gold is an Article of Faith,
Not Rational Investing
Some people denigrate gold to a relic of the past in
terms of its economic importance. The most recognized of today's detractors
is perhaps Nouriel Roubini, the famed NYU economist who repeats John Maynard
Keynes' cry of the 1930s that gold is a
"Barbarous Relic".
Still others go further, saying that choosing to own investment gold is
anti-social. The argument is that there is no
longer any need for gold as a form of exchange, nor as a store of value.
Governments and central banks have done away with the need for gold. Which is
why gold's only value today lies in the jewelry and electronics trades.
In addition, other analysts write about gold being a
faith-based investment and mock it as a
type of religion. There are certainly those that
invest on faith, and they can be loud, giving the impression that investors
in gold are extreme. But this can also be said about the defense of the US
Dollar. That currency in the end is only a piece of paper that has no other
use than that ascribed by the government. If you put fire to a dollar bill it
will turn to ashes and float away. But if you put fire to gold, at the right
temperature you get a liquid metal that not only is useful to the arts but
important in the electronics and high technology industries.
"We may one day become a great commercial and
flourishing nation," wrote George Washington, the first President of the
United States of America, on the subject of paper money in a letter to Jabez
Bowen, Rhode Island, on 9 January 1787. "But if in pursuit of the means
we should unfortunately stumble again on unfunded paper money or similar
species of fraud, we shall assuredly give a fatal stab to our credit in its
infancy.
"Paper money will invariably
operate in the body of politics as spirit liquors on the human body. They
prey on the vitals and ultimately destroy them."
It is difficult for those in power to try to
overcome this truth, embodied by all of recorded economic history. And it
becomes more ludicrous as governments also hold gold bullion in vast amounts.
The modern central banking system, now more than 100
years old, may seem to shape this perception. Yet in the last decade central
bankers themselves, albeit in Asia and other emerging economies, have been
significant buyers of the yellow metal. Western governments as a group have
stopped selling gold.
Why? Economic chaos causes distrust amongst
governments and central banks, leading those in power to seek out avenues to
strengthen their position with other parties. The position central banks look
for to strengthen their balance sheet and ensure their place in the global
economy is gold. The United States rose to dominance worldwide alongside its
dominant gold reserves. Now becoming a market economy, and hoping to become
the next big global economy, China is also building its central bank gold
reserves. It becomes obvious that gold has a very deep, very human value,
ascribed to it by history and by all major powers today.
Value isn't the same as price, of course. Which is
why, perhaps, gold investing remains such a mystery to some people.