In almost all economic downturns, the price of gold and stocks of companies involved in its digging and selling usually go up. This is understandable, since time immemorial gold has been the metal all civilizations have craved and fought over. But the value of gold, like other fruitage of the earth is only as valuable as people are ready to pay for it.
Earthlings, Strange Creatures
Imagine aliens somewhere in their spaceships looking down at Earth to observe the activities of its human occupants. They see the earthlings digging deep for a shiny yellow malformed metal. They notice the earthlings don’t eat it. Nor does it produce fruit, water or shelter. The aliens have also noticed that it’s not used as currency between most people. For that purpose the earthlings like to exchange pieces of paper.
As the aliens keep watch, the earthlings melt the deformed metal into nice symmetric shapes, and hide it from view into vaults. Now the aliens are confused. What is the purpose of going through all this trouble for a metal with no real purpose except for gathering dust? The aliens have now received intel on the earthlings that they use this stored metal as an “investment”, and that there is a finite amount of it stored on the entire planet. This is when the extra-terrestrials realize that earthlings have too many definitions of investing and are thus not interested in exploring their primitive minds any further. They turn their starship back on course to their home planet, where investment involves an asset, which produces output.
A Sense of Safety Through Hedging
Gold is bought due to its perceived safety. It has had exchangeable value throughout all civilizations. Since its finite in nature, the metal becomes scarce. There is a strong case to be made that having gold gives protection against the whims of fiat currency. Endless money printing creates fears of inflation, and Midas’ kryptonite feels more objectively real than currency that mainly exists in the bit-ether.
I believe gold will always have value. Our nature has not evolved beyond thinking otherwise today. There is nothing inherently wrong with owning gold. Heck, I wouldn’t mind having a few bullions stored somewhere in a vault myself. When the apocalypse arrives, perhaps I could exchange these bricks for a ticket to safety..? Oh, and not just ingots. I am somewhat of a watch geek in my personal life, and there is something tastelessly appealing about a mob boss-esque yellow gold Rolex Datejust timepiece. But I digress.
The issue is not with buying gold, but rather when it’s used in the same sentence with the word “investing”. Definitions may vary between individuals, but I believe this one makes the most sense.
Productive vs. Non-Productive Assets – Choose One
Gold can be classified as an asset. This is true. However, it is a non-productive asset. it produces no cash flow. The only way you will get cash out of gold is to give up your share of the metal as a trade. You can fondle it, admire it, polish it, show it off. But is this an investment?
Compare this to productive assets. These have real-life value and like gold, can also be exchanged for cash. Real estate, machinery, land, IP and the like. But the value does not come from its sale value, but rather in what it produces. This is what makes productive assets more appealing to me than gold.
The value of an investment is the total amount you will get in return during the lifespan of the investment. In business, this means free cash flow discounted back to today at an appropriate rate. If you were offered choice of owning the ten best businesses in your hometown (or abroad), or bullions of gold, which would you choose?
The problem with “investing” in gold is that its price is entirely based on supply and demand. Obviously the “best” time to buy gold is probably when the economy is booming and the prices are low. But who wants to own something that’s “not going anywhere” in these jolly times. What inspired me to write this post is the fact that recently gold has (unsurprisingly) surged due to economic fears related to COVID.
Since there is no output from gold, there is no intrinsic value. The value is only in what people are willing to pay. And since I can’t value gold, how would I know if the price I’m paying is good, thus making it a prudent “investment”?
Conclusion – Do As You Wan’t. But Do It For the Right Reasons
The purpose of this post is not to discourage anyone from buying or selling gold. The purpose is to engage your brain into thinking about perspectives on investing. If gold is a part of your investment philosophy or strategy, great! As long as you’re in it for the right reasons. Whatever these reasons are, ask yourself: “Is this helping or hindering me in achieving my investment goals?”
And hopefully you bought at a good price.
-IGTSKasimir
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Warren Buffett has had a few takes on gold throughout the years. Just recently, there has been news on Berkshire buying stock of Barrick Gold. However, considering his past takes on the subject, I doubt its Warren behind the decision, but rather Todd Combs or Ted Weschler, who each oversee their own portfolios within Berkshire.
Further Reading
Warren Buffett – The Partnership Days (1956 – 1969)
Philip A. Fisher – Lessons From The 15% Man
The Best of Ben Graham – Security Analysis
Phil Town – The Compounding River Guide
Margin of Safety – The Most Important Thing
Intelligent Investing = Thinking In Probabilities
The Emotional Stages of a Value Investor
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