With all due respect to Vitaliy, I only agree with two of his five reasons to avoid the gold rush (#3 and #5).
I believe that gold remains a valuable inflation hedge, especially due to its low correlation with traditional assets.
Overall, the long-term outlook for inflation is a good reason to have precious metals in your portfolio.
I hope Vitaliy enjoys my rejoinder to the five reasons he is skeptical about today's gold rush.
- Lack of Intrinsic Value: I disagree. Gold does have industrial uses due to its remarkable ductability and resistance to oxidation. But it is the scarcity of gold that gives it value. Gold has been an unparalleled store of value throughout history.
- Concentrated Ownership: To paraphrase Vitaliy, "GLD, the gold ETF, is the sixth largest holder in the world." I disagree: GLD serves as an intermediary, and the ultimate holders are individuals and institutions. The existence of an ETF may encourage speculation, but I do not view the ETF as a form of concentrated ownership.
- Alternative Inflation Hedges: Vitaliy has a point here: The existence of TIPS, WIPS, and commodity baskets diminishes the value of GLD as "the only game in town" to hedge inflation.
- Decline in Gold Prices: Vitaliy claims that a decline in gold prices would undermine the perceived value of gold. I agree, but I must respectfully dismiss this as a circular argument.
- 200 Years of Returns: I will concede this point, which is the best reason for not owning gold. Commodities are a means to an end, not an end in themselves. They do not naturally generate investment returns as public companies do. If profits lag, shareholders can push for a restructuring or a change in management. Commodities, on the other hand, are merely costs in the capitalist equation, making them vulnerable to substitution, reduction, or elimination.
Vitaliy concluded his article by proposing that stocks in companies with pricing power are a better hedge against inflation. I made a similar point at the end of my article Friday, so we agree. But owning gold and owning stocks are not mutually exclusive.
Disclosure: Long GLD