It's hard out there for a gold investor. The outcome of the European elections this past weekend was hardly the news to raise hopes that crisis would be averted across the region. Nor did they necessarily bolster confidence in the strength or sustainability of fiat currencies, including most notably the euro. Yet Gold has fallen by over -2.2% through the close of trading on Tuesday and is now down -10% from it peak at the end of February. Amid this weakness, it is not uncommon for some to step out in the media to take some pot shots at Gold. But these criticisms are often dismissive and obtuse, as they ignore a number of key points in defense of the yellow metal.
Despite the recent price weakness, the fundamentals for owning Gold remain strong. The threat of another phase unfolding in the global financial crisis is rising with each passing day. And the instinctive policy response to such episodes remains the application of further monetary stimulus and competitive currency debasement. And the outcome of the elections in France and Greece this past weekend suggests a renewed shift away from austerity and toward additional deficit spending. Such are not the conditions that typically inspire investors into flock into fiat currencies. Instead, they typically seek the hard asset store of value provided by Gold. Although this positioning has been under pressure in recent weeks, it remains reasonable to expect that it will be rewarded over time as it has to this point over the past decade.
In addition to recent price weakness, Gold has also sustained a beating in the media by some prominent investors. Leading among these is Warren Buffett and his partner Charlie Munger. But in many respects, these attacks are unwarranted for the following reasons.
First, many investors own Gold not because they wish for an Armageddon scenario. To the contrary, many owners of Gold share a long-term optimism about the global economy despite the issues that we must work through in the short-term. And during times of uncertainty such as the current secular bear market in stocks that began over a decade ago, Gold has demonstrated itself to not only be an attractive store of value but also an asset that is an outstanding portfolio diversifier due to its negative correlation to stocks.
Also, the repeated knock on Gold is usually that it is not a productive asset. But this ignores the fact that investors typically do not own Gold for its productive purposes. Instead, it is often held as an alternative reserve currency. Just as Gold is not widely used for productive purposes, nor do we see many businesses building things with the paper of euro currency notes or stacks of U.S. five-cent nickel coins. To the contrary, many are holding Gold as a currency that can be converted back into fiat if desired at a later date to purchase productive assets.
And it is on this very point that I would direct criticism against Mr. Buffett and Mr. Munger. While Mr. Buffett bashes Gold’s lack of productive value during a recent interview, he explicitly concedes the fact that investors in Gold "have a correct basic premise that paper money will be worth less in the coming years". And his partner Charlie Munger states in a related interview that "civilized people don't buy gold, they buy productive businesses." These two statements together make the flawed assumption that investors will chose to exclusively hold productive assets instead of paper money. But this is typically not the case, as many investors including Mr. Buffett often hold meaningful allocations in money as they wait, sometimes for extended periods of time, to acquire productive assets at the best possible price. With this fact in mind, is it irrational to simply concede the fact that the paper money being held will be worth less over time when the opportunity exists to hold an asset that will insure against this loss of value. By owning Gold, an investor is acting rationally by protecting the value of their money until such time that they wish to spend this money for the purchase of productive assets.
Thus, I would counter Mr. Buffett and Mr. Munger by suggesting first that owning gold has nothing to do with civility and little to do with caves or Armageddon for that matter. Instead, it has everything to do with investor rationale. And I would contend instead that RATIONAL people buy BOTH Gold AND productive businesses to protect against the decline in the value of paper money. And at certain points in time, favoring one category over the other is beneficial depending on the prevailing circumstances.
For these reasons, I remain long Gold as a core fundamental instrument as part of a broader diversified investment strategy that also includes productive businesses. Investors can establish exposure to Gold in several ways. This includes holding the physical metal. Others include various exchange traded products including the SPDR Gold Trust (GLD), the iShares Gold Trust (IAU), the ETFS Physical Swiss Gold Shares (SGOL) and the Sprott Physical Gold Trust (PHYS).
Disclaimer: This post is for information purposes only. There are risks involved with investing including loss of principal. Gerring Wealth Management (GWM) makes no explicit or implicit guarantee with respect to performance or the outcome of any investment or projections made by GWM. There is no guarantee that the goals of the strategies discussed by GWM will be met.
Disclosure: I am long GLD.