The Case for Owning Gold

The Wall Street Journal called gold a pet rock. John Maynard Keynes, a famous investor and economist, called it a barbarous relic. Numerous studies have been done showing gold to be a poorer investment than stocks. It pays no dividends, for starters. Nor does it pay interest. Plus, storing it is a hassle. Also, it basically does nothing except sit in a spot and slowly tarnish. Who would want to own such a thing?

Well, only human beings for over five millennia. That’s an irrefutable fact, and one which those bearish on gold never touch upon. They also presume a false dichotomy – either you own gold or you don’t. In investing, it’s never that simple. Before addressing these arguments, let us first take a look at the why of gold ownership.

Why is gold valued? Is it because…

  • it is the second best conductor of heat and electricity, after silver
  • it is the second most reflective metal, again after silver
  • it is the most malleable, ductile and corrosion-resistant of all metals?

These properties lend themselves to use in jewellery making, dentistry, electronics and medicine. But these are only secondary uses of gold. Its main use is as money – as a store of value and a medium of exchange. Wealthy kingdoms had a lot of gold in the treasury, acquired by winning wars and looting neighbouring kingdoms. Rich merchants had a lot of gold. Pirates sunk ships to get at the gold on board – not stock certificates. People fleeing war-torn zones fled with the clothes on their back and the gold in their pocket. During World War II, several countries stored their gold in the United States for safekeeping against the invading armies.

If gold is a pet rock or a barbarous relic, it stands to reason that all these people, throughout history, were nuts. Or, Keynes and his worshippers are wrong. I would rather side with five millennia of well-documented history than the followers of one economist and conclude that gold does have value, that it has always been regarded as money.

True, it is not regarded as money today. So, the question we need to ask ourselves is: will gold be valued as money again in the future or are its days as money over for good? If it is the former, it might make some sense to consider owning gold. If it is the latter, it might be time to dump this yellow metal for good before it becomes worthless.

Among all the arguments in favour of gold as money, I find one to be the absolute clincher. The central banks, the institutions that print the currency notes we regard as money today, own gold themselves! And they aren’t selling. If anything, central banks are now net purchasers of gold, adding to their gold reserves. According to the World Gold Council:

“Central banks’ behaviour with respect to gold has fundamentally shifted over the past few years. This reflects a combination of slowing sales from European central banks and large purchases from emerging market countries in Latin America, the Middle East and Asia. Since 2010, central banks have been net buyers of gold, and their demand has expanded rapidly, growing from less than two per cent of total world demand in 2010 to 14 per cent in 2014.

Gold plays a prominent role in reserve asset management, as it is one of the few assets that is universally permitted by the investment guidelines of the world’s central banks” (all emphasis mine).

For the institutions that print the currency we use as money today, their own product is not good enough for them. No, they need to exchange it for gold and quietly stash it away, paying for insurance, shipping and storage. They don’t mind not receiving dividends or interest on stored gold. They embrace the hassle of letting it sit in one spot and slowly tarnish. They sure wouldn’t do that unless they believed gold was money. Actions speak louder than words.

We have now established two points in favour of gold as money:

  • It has been that way over five millennia
  • The central banks which print today’s money regard gold as money and are exchanging more of their paper money for gold

And one against:

  • The Wall Street Journal said so

I declare a unanimous victory for the gold as money camp, even if a prestigious newspaper such as the Wall Street Journal, with its oracle-like powers of making perfect judgements, says it isn’t so.

OK. Gold is money. Now what? Why should I own gold? You should, because:

  • Gold is money in our culture. Culture is one of the strongest forces in the world, one which can’t be stamped out quite so easily. The cultural history of gold is alone enough of a reason to keep this asset class in a permanent watch list.
  • We are in the midst of a global currency war. Jim Rickards wrote two books on this. Central banking is inherently inflationary, and their recent actions even more so. Now, the problem with saying this out loud is that the government has all sorts of statistics to claim that there is no inflation or even that we are entering a deflationary era. Those figures are as good as the USSR’s potato production statistics. I’ll put out some rough stats of my own. I recently took a look at the BoJ’s (Bank of Japan) monetary base. It has grown 17.5% year-to-date and 30% over the past year. The Fed’s (Federal Reserve) balance sheet has grown from $800 billion in 2007 to $4.2 trillion in 2015. The BoJ, ECB (European Central Bank), Fed and BoE (Bank of England) have together increased their monetary base by about $8 trillion since the 2008 crisis. In a fiat money world with a debt based monetary system, debt in a bank’s balance sheet is money. A McKinsey report found that global debt levels have increased by $57 trillion (yes, trillion) since 2007. In terms of debt to GDP, it has increased from 269% to 286% of global GDP. China alone has quadrupled its debt levels, injecting over $21 trillion into its economy since 2007.

Central bank balance sheet

  • The current situation has no historical precedent. The reserve currency of the world, the one valued by everyone, is issued by the largest debtor nation in the history of the world, the country where 45 million people depend on government assistance to eat every day. This is an insanity which has not been repeated on a global scale – ever. Printing money has always been tried by governments, it has never worked, and never will work. Money is a token of value (sorry, Austrians). Increasing its supply will not increase the value added by individuals operating in a market economy. At best, it merely steals value. At worst, it leads to a total collapse of the production structure and the economy grinds to a halt as capital is mis-priced and mis-allocated.
  • The above hints at why gold is the only safe haven at this time. Capital is mis-priced. Bonds are a claim on capital and the income generated from capital. Stocks are a claim of ownership on capital. If capital is mis-priced, it stands to reason that so are stocks and bonds. (I explain this in detail in another article, go here). And if currencies are mispriced as well, since they are manipulated by central banks, and the central banks always inflate and reduce the value of currency, the only real store of value left is gold (and silver). They have a long history as money. They have had changes in their purchasing power, to be sure. When the Spanish flooded Europe with silver taken from Mexico and Peru, they did cause inflation. Priced doubled in…. 100 years – and created quite a furore. That’s a far cry from the current paper money system where prices double every 5 years.
  • Taken together, there has never been a better time in recent history to own gold (and silver). When it comes to wealth preservation versus wealth destruction, better 10 years too early than 10 minutes too late. A minute too late and you’ll not have any wealth left. Collapses happen gradually, the signs are all there, and then they happen all of a sudden. By the time everyone wakes up, it is already too late to take action. The time to buy put options is at the peak of the bull market; the time to buy insurance is when it is really cheap and no one feels any need for it. The time to buy gold is now, when investors globally have been taken in by the central banks and think that a few wizened men and women are capable of manipulating money and making everything all right. When the myth explodes, gold will most definitely withdraw its bid on paper money and won’t be available for any price on these pieces of paper with dead men printed on them.
  • The next crisis has already begun. Already, people are waking up and beginning to question the central banking “everything is hunky-dory” rhetoric. Physical silver is enduring a supply shortage worldwide. The dominoes are in motion. Recall V on the final day of his life – the 5th of November (from the movie V for Vendetta, which, incidentally, is a must watch).
  • For someone with no knowledge of the markets, with significant savings in paper money, specifically bonds, it’s time to get the hell out of them and run, not walk, to acquire gold. Anything less than 10% of one’s portfolio is simply inadequate for what’s coming. Think position sizes of 20-25% and above, especially if you have a lot of wealth to preserve.

Forget about the current gold price and its fluctuations up and down. The price is a liar – markets do get things wrong, creating opportunities for those with the courage of their convictions. I hope I have added to your conviction with this post.

4 thoughts on “The Case for Owning Gold

  1. Pingback: Still A Gold Bull – Commentaries on the World of Business

  2. Pingback: Silver – All Set to Shine | Commentaries on the World of Business

  3. Bala

    You could call Keynes a charlatan, a snake-oil salesman, a voodoo artist, a scamster, an intellectual pygmy or even a pseudo-economist, but never an economist. To be an economist, you should be working on economics. That man just didn’t “do” any economics.

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