|
The following note about gold was included towards the end
of Jeremy Grantham's
Q3-2010 Letter:
"Everyone asks about gold. This is
the irony: just as Jim Grant tells us (correctly) that we all have
faith-based paper currencies backed by nothing, it is equally fair to say
that gold is a faith-based metal. It pays no dividend, cannot be eaten, and
is mostly used for nothing more useful than jewelry. I would say that
anything of which 75% sits idly and expensively in bank vaults is, as a
measure of value, only one step up from the Polynesian islands that attached
value to certain well-known large rocks that were traded. But only one step
up. I own some personally, but really more for amusement and speculation than
for serious investing. It may well work and it may not. In the longer run, I
believe that resources in the ground, forestry, agriculture, common stocks,
and even real estate are more certain to resist any inflation or paper
currency crisis than is gold."
We agree that gold is a faith-based metal, although we
don't like the term "faith-based". It is more appropriate to say
that gold's value is not primarily determined by how much of it gets consumed
in industrial, commercial or digestive processes. Gold is not "mostly
used for nothing more useful than jewelry", as Grantham claims. It is
mostly used as a store of purchasing power. And at a time when there are good
reasons to believe that the official money will be subject to increasingly
rapid inflation, a reliable store of purchasing power is extremely useful.
While it is true that commodities other than gold can be
reasonable stores of purchasing power, gold is best suited to the role. One
reason is that so much of it "sits idly" in vaults. The fact that
industrial/commercial uses account for only a tiny fraction of its total
demand makes gold the only commodity that can be accumulated in large amounts
by investors without adversely affecting the economy.
Of course, the reason there is so much gold sitting idly
in vaults is that gold has proven itself in the past to be extremely useful
as a store of purchasing power. This usefulness relates to its physical
properties. For example, it is much easier and cheaper to transport and store
$10M worth of gold than to transport and store the same dollar amount of oil
or base metals. For another example, diamonds offer the advantage of being
cheap and easy to transport and store, but for many people diamonds are
disqualified as convenient depositories of purchasing power by their lack of
homogeneity (every diamond is different and it takes an expert to assess the
monetary significance of the differences) and divisibility. The precious
metals (gold, silver and the platinum group metals) are really the only
commodities that have near-ideal physical characteristics to be stores of
purchasing power, but the platinum group metals must be immediately
eliminated from consideration by the fact that all of their supply goes to
satisfy industrial/commercial demand.
Land, especially land that generates an income from the
production of crops, livestock or timber, could turn out to be an excellent
store of purchasing power over the next 10 years, but land has the
disadvantage of being illiquid and immobile. You couldn't, for example, move
your land in order to sidestep an adverse change in the political
environment, and you might not be able to sell it in a hurry.
Common stocks can be good investments if bought at
reasonable prices, but they aren't reliable stores of purchasing power. One
reason is that the real return provided by the shares of a company will
largely depend on the decisions made by the company's management. One wrong
decision by management could wipe out a lot of purchasing power.
In summary, Grantham is correct when he says that gold is
a "faith-based" metal. Like paper currencies, gold has no
"intrinsic" value. Grantham's mistake is assuming that gold's lack
of use in industrial/commercial applications makes gold useless. The reality
is that a reliable, convenient and widely-accepted store of purchasing power
will be very useful at all times, and will deserve a hefty premium at times when
a policy of currency depreciation is being aggressively pursued by the
stewards of the official money.
Steve Saville
www.speculative-investor.com
|
