Gold's Shifting Role as an Investment

It took me some time to reach a conclusion on gold because I kept getting stuck on that “where’s the inflation?” thing. Also many of the proponents of gold seem like conspiracy theorists and altogether odd ducks that are tough to take seriously. I did notice over the last year that some fundamental investors had reported large positions in gold call options. That struck me as odd but without knowing their entire portfolio strategy I couldn’t tell if this was a real position or a just hedge of some kind. But gold has shifted its role in the past decade and appears to be ready to continue that trend.

Gold is basically being crowd-sourced by the rich into a global standard without anyone “officially” having to do anything. We can thank governments again for their short-sighted zeal in going after more revenue rich people for creating this shift. Besides printing lots of paper money the governments have finally penetrated the “safe havens” that were used to keep money - secretive Switzerland and hidden offshore accounts are no longer easy, stress free ways to keep money safe and hidden from the governments of the world.

At the same time, governments have made no secret of the fact that the rich will be paying more in taxes to finance these huge deficits being run up to support the economy. The combination of a a more aggressive tax collector and fewer places to hide deposits is a simple recipe for the rich looking for new places to put their money.

Gold is a refreshingly simple and silent hunk of metal. It’s the complete opposite of all those exotic derivatives and quantitative investment vehicles that soaked the rich. Nobody has to know what you have, where you keep it and if you give or receive it. (Technically of course one needs to declare all income, even if paid in gold, but you get the picture.)

It was pointed out to me that gold prices in the last decade have not really traded in a way that suggests that they are really linked to inflation. So the relationship between gold and other assets has been changing. It could also be that the economies that are now driving growth in the world (like China) are fond of gold and although they are forced to buy and hold many USD, they may prefer gold.

The drawbacks to owning gold are less important today. One of the key criticisms about gold is that it is not a “productive” asset and pays no interest. One can’t rent it like real estate and there are no dividends or other cash flow. (If you need your gold stored there are even costs in the form of storage and insurance.) But real interest rates (interest paid less depreciation of the currency) are not very attractive (possibly negative in fact depending on how you do your math.) Rental real estate is becoming attractive again so it may begin to do well alongside gold too. The key there remains “CAP rates” of 10% or more, depreciation and low mortgage rates. But even if that’s true today the wealthy will want to use multiple asset classes to diversify.

The debasement of currencies and the gross incompetence of the governments makes gold more attractive every day. All the data on the development of gold suggests that even reasonable investors without a fixation on commodities or conspiracy theories will want to have a gold position in their portfolios. The global macro trends in place today appear to be fairly durable. A position in gold makes sense so long as that is the case because incremental assets will be allocated to gold under these circumstances.

Rich people are very keen to hold on to their money. Gold looks like an irresistible solution for them for a chunk of it.

Disclosure: The author owns shares of GLD.

Comments

[Vuke:]

It's not just the rich, Mr. Tuttle, the poor, the middle class and anyone else astute enough to recognize the inherent danger of paper have been buying gold. They buy it not as an investment but as an insurance policy against currency devaluation, a strategy that, to date, has worked well.

Interestingly, if the truly "rich" have been piling into gold its price would be in the stratosphere. Bill Gates, alone, could buy almost this year's entire world production at $1,000 an ounce so the rich have to seek alternative means to protect the bulk of their wealth.

Gold, then, becomes the magic hand of the market that allows the less well off to benefit as paper values burn. So much so, I suspect, that if the masses of the world turn to it, values of all paper (GLD included) will crumble.

Its no wonder financial markets and central banks hate it so, for it threatens their very existence. The idea of ordinary people, working stiffs and small businesses holding such power must be, to them, a nightmare. Every coin purchased appears a vote against their control.

Oct 11 09:26 AM

[Angsthase:]

> Its no wonder financial markets and central banks hate it so, for
> it threatens their very existence.

If I were Federal Reserve Chairman, I would sell yet more paper (what's another Trillion...) to the Chinese and "quietly" start accumulating gold --

Sure, the price would start to rise fast, but so what -- who cares what the price would be in fiat paper...

Oct 11 12:24 PM

[The Recusant:]

Let the rich have their gold if they can afford it. For the rest of us give us our silver, which by the way, will have a greater jump to the the upside.

Oct 11 12:41 PM

[Vuke:]

I think that was the plan but the Chinese appear to be beating them to it by using their mountains of previously printed stuff.

CB's forget Gresham's Law, "bad money drives out good" and leased their gold out so that anyone with a few pieces of paper could buy a piece. Now the bad money is lined up in a long queue seeking an exchange.

On Oct 11 12:24 PM Angsthase wrote:
> >If I were Federal Reserve Chairman, I would sell yet more paper (what's another Trillion...) to the Chinese and "quietly" start accumulating gold --

Oct 11 01:23 PM

[paxjds:]

You traded paper for paper in securing GLD, all promisary notes. Sell your gld, and buy some St. Gaudens and/or 1 oz Eagles or Maples. Then you will have REAL Gold in lieu of promisary notes. Then, and only then will you get to really understand GOLD and its intrinsic value for thousands of years. Then try to print some more gold like the bankers print $'s.

Oct 11 08:46 PM

[bindlepete:]

Real Gold or Foreign Miners? That is the question.

Either is better than cash --- I think.

Oct 12 08:48 AM

[dmintman:]

Good Morning!!! If you like more go to my good friend at www.raregold.com

Oct 12 09:41 AM

[twitee:]

We are slowly seeing the nay Sayers becoming believers of the Gold Move....it is not too late this is just the beginning....

The only thing to remember is that as soon as US economy stabilizes gold will have a violent move downward.

US economy stabilizes when the reflation cycle has been completed and the home prices along with your milk and bread have risen by two to three fold.

Once the US Real Estate market rises the US financial institutions will gain greater power and the Capitalism will be back in a more sophisticated way.....You have to be able to recognize this fact to sell your gold as fast as possible.....No one knows when this scenario pans out... it could take between 2-5 years or even more

Oct 12 12:25 PM

[twitee:]

e main problem for an average investor with real gold coin is that, it is not liquid and it may take a while to sell at a much lower price than the market, but when you buy it, you have to pay premium price for it........ On the other hand, Rare gold coins hold their value regardless of large gold price moves......

Oct 12 12:37 PM