Over the last 10 years gold has been on a seemingly unstoppable rally. The effects are everywhere, in cities across the country strip malls have been invaded by a swarm of “we buy gold” stores, the infamous Tupperware parties of suburbia have been replaced by gold buying parities, and a whole new crop of illiterate investors are buying gold. We have seen a resurgence of the gold bugs who have come out of the wood work to preach metal to all who will listen.
Those who are bullish on gold have a few key phrases they use to justify the rise in price. They include: gold has never been worth zero; in a time of crisis gold will retain value; and all investors should hold gold as a hedge. All of these statements fundamentally lie on one assumption, when panic arrives and the forecasted doomsday happens people will want gold. I find this assumption to be untrue and defiant of logic. Currently gold is measured in relation to currency, but in a time of crisis in which currency has become severely inflated or worthless what will gold be worth? In a time of crisis where currencies have lost a substantial value, gold will be worth its weight in relationship to other commodities. For example gold is currently worth about $1550 an ounce [SPDR Gold Trust ETF (GLD)], but if due to crisis the dollar becomes worthless gold’s value will have to measured by real commodities like grains, industrial metals (JJM) , livestock (COW), farmland (JJA) , and the list goes on.
So why buy gold when you can buy the commodities themselves? And if it is a time of crisis who says people will trade commodities essentials for survival for a yellow metal. The greatest demand from gold comes from the jewelry industry, a highly cyclical industry that bears a high correlation to the stock market. The only real value gold has comes from demand for jewelry and few industrial applications; it has little real value. Gold bugs say gold does not hold the risk currencies do because there is no corrupt government regulating or in charge of it like in the case of a currency. This is partly true, the value of gold is not determined by any central bank, but it is determined by the market. As humans we will always value food and shelter more than an arbitrary yellow metal. By this logic the price gold should never outpace the price of farmland (JJA) , oil (OIL), Natural Gas (GAZ) livestock (COW), grains (JJG) , and other real commodities. These real commodities hold the same exposure to inflation, while also maintaining a very inelastic demand curve.
By no means am I saying that gold cannot rise to $10,000 an ounce as some gold bulls are predicting, because as is said on Wall Street “the market can stay irrational longer than you can stay solvent.” But every rational investors interested in investing in gold should really evaluate the risk they are taking when investing in the "safest currency."
There is a myriad of ways to invest in or bet against gold including futures, ETFs, bullion, investment grade coins, and mining companies. Common gold ETFs and miners include SPDR Gold Trust, AngloGold Ashanti Limited (AU), Randgold Resources Limited (GOLD), Market Vectors Gold Miners ETF (GDX), PowerShares DB Gold ETF (DGL).
For the "real" commodities mentioned in this article there are a variety of ETFs that track commodities indexes that include: DJ-AIG Agriculture Total Return Sub-Index ETN (JJA), Dow Jones-AIG Grains Total Return ETN (JJG), Dow Jones-AIG Industrial Metals Total Return ETN (JJM),Dow Jones-AIG Livestock Total Return ETN (COW), Dow Jones-AIG Natural Gas Total Return ETN (GAZ).
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.