Every week I get a few comments or emails from people wanting to know what I think of gold as an investment. I have responded to these in various posts and interviews over the past few years. To reiterate for those that have missed it, I have always explained my thoughts generally as follows:
- Gold makes no sense to me as an investment. It pays nothing, it is not essential for anything in our economy, and as an analyst I have no way of assessing its fair value.
- I understand that some people have a passionate committment to gold as “a true store of value”, “the only real currency” , and a hard asset that can be used as a medium of exchange in the event that the paper financial system blows up. I have no problem with any of these ideas. I would never try to talk anyone out of their beliefs in this regard and I have always said that people should own gold it they feel better or more protected doing so than not.
- That said if one is holding gold for these reasons, I see no protective value in doing so through paper versions such as gold funds, gold ETFs or gold company shares. All of these assets trade as paper assets and if the fiat financial system implodes (as many gold bugs insist that it will) these paper assets are at risk as well. Indeed we need only look at the performance of many gold funds and gold companies in the last credit crisis in 2008, where many lost huge value, including the Canadian Gold company ETF (XGD) that lost 47% with the overall market decline between February and October 2008. What protection?
- If one wishes to hold gold for the usual arguments, then it seems to me the only reasonable approach is to buy physical gold bars and coins and store them in a secure place. Although I do not see how a bank vault or safe deposit box makes sense for this. Aren’t you concerned about the stability of these very institutions? It makes no sense then to deposit your gold there it seems. So the gold one holds should be held somewhere in their own home or property under secure lock and key (in case of course you are robbed, or it melts in a fire).
- Physical gold stored in your own secure premise seems a rational approach if you want to hedge against the collapse of the financial system and free world. The question then becomes how much of your cash do you wish to exchange for gold. This is a personal question that each person must decide for themselves. Is it 5%, 10%, 20% more? Keeping in mind of course that the gold sellers are telling you cash is worthless and yet they are taking your cash and giving you gold. And also keeping in mind that in hoping that your gold sky-rockets in value you are also hoping that the rest of your assets and net worth plummet. This is a complex asset allocation decision.
- We have been in a long gold bull for more than 10 years so I understand the human propensity to see only further gains and perhaps gold will continue to gain for longer still. But one thing is for sure: no bull run in any asset has ever lasted indefinitely–and certainly not gold. Many argue that gold has been a store of value for centuries. But when one actually reads the history of gold (see The Power of Gold, by Peter Bernstein as one excellent historical reference) one sees that gold fever has come and gone hundreds of times through human history. It is has had spectacular runs up and down where fortunes have been made and lost with the “barbarous relic”. You really want to bank on “this time is different”? Maybe; best wishes with that.
- The other major issue today is that like the tech bubble in the late ’90’s and the housing bubble in the mid-2000’s, assets that have had extended runs up become heavily populated with those selling the story. I see this today in gold more than ever. Many of the vocal ubber-bulls are in the business of selling the physical gold or gold funds, ETFs or gold company shares to others (in exchange for their cash, as aforementioned).
- As in all things, if you are taking your buy advice from those who are paid to sell you the investment products, you are putting yourself and your capital in harm’s way. Whenever you hear someone talking about the merits of gold, as with other investments, you really need to ask yourself where do they sit in terms of their role and vested interest in what they are telling you.
- Even for those who are not selling the stuff, I see the same issue frequently in those who are already invested in gold personally. Many of them have become supremely confident and passionate in their attachment to ‘gold belief.’ This is so pronounced in some that they take the time to send me abusive emails demanding to know why I won’t tell everyone to buy gold and saying that my blog is useless because I won’t.
Really? I tell you what. If you find the blog useless, how about you don’t read it. How about you spend your time elsewhere in ways you deem productive. There are tons of gold worship sites and people you can spend your time with; there is certainly no need for you to frequent my blog. At all. Really, we understand. And keep in mind that the more belligerent and attacking your correspondence is to me on this issue, the more the evidence of irrational exuberance in this area.
Dear gold lovers, now that you have my thoughts as requested, please go forth and be happy with your choices and beliefs. Don’t bother sending me more emotional rants trying to change my mind or convince the world of your views like a bunch of religious zealots. Comments of this kind will simply be deleted without reading. Now that I have spent the time laying out my thoughts in detail here, future requests for my opinion on gold will simply reference this post.