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Why Own Gold?
By: John Petrides, Growth Portfolio Manager
Date: 6/21/2010
The argument I hear from investors to the merits of owning gold goes something like this:
1. Its a store of value when all other currencies fail
2. Its a protection against inflation since gold can not simply be printed like paper currency
3. Its the safest haven during economic, currency, social, and or political crisis
4. Its demand has increased from emerging economies creating new wealth
In a nervous environment such as the current state of the global economy and financial markets, the gold story can appear attractive. However, investors would presumably be buying gold for its intrinsic value, not for its aesthetic appeal. But if the financial world were in turmoil and money became useless, economies collapsed, and political and social upheaval ruled the day, then wouldnt you want an asset that had some use or intrinsic value? Why would one want to own a shiny stone that has no purpose? The large majority of golds use is to make jewelry. Typically, gold is mined out of the ground, and then shifted to a vault where it is placed backin the ground.
If the global economy were to collapse and the prevailing money exchange system ceased to exist, we as a society are going to be in deep trouble. However, I personally dont want to be stuck owning a shiny rock that I cant do anything with. In fact, if the world economy were to collapse as some hint at with a European credit contagion, I would rather own a commodity such as lumber or corn, or iron ore. If Armageddon presented itself, at least I can use the lumber to build shelter, start a fire, float in the water to escape riots, etc. In fact, I would rather own a TREX (a stock we own) composite decking board since I know it would not rot from bad weather. Im obviously exaggerating the example, and I understand that I am picking a fight with currently the biggest kid in the schoolyard, but I think investors should think about the intrinsic value of gold, rather than simply buying it for the sake of buying it.
Owners of gold make a presumption that there will be a ready buyer to take it off their hands, should they want or need to sell. This assumption may be unwarranted. In a time of stress, people will want food, housing, perhaps a rifle, but why would they want gold? Buyers of gold actually make an even stronger assumption, which is that a buyer will materialize who is willing to pay more for this shiny rock than they did. For this reason, buying gold is the epitome of a speculative investment. Without any inherent value or use, the only basis for buying gold is that you believe another buyer will pay you more. This makes buying gold more speculative than any other commodity for which there is some use and, therefore, some inherent value. Plus, from a fundamental standpoint, how does one value gold? The conceptual answer is to match supply with demand and an equilibrium price is created, but how does one measure supply? Well, gold is mined, so that is one part of the equation, but what about the holders, i.e. central banks, investors, who keep the shiny rock in their vaults? How is that level of supply factored into the equation? Again, these questions need to be considered by investors before buying gold for the sake of buying gold.
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