Did you happen to read Jack Hough's recent Wall Street Journal article, "How Much Gold Do Investors Need? Zero Should Suffice"? Next to endless commentaries on the Treasury "bubble," articles trashing gold (NYSEARCA:GLD) seem to be a favorite pastime of the financial media. There is plenty to discuss from Hough's article, but I would like to comment on two quotes in particular.
Still others view gold as 'real money' -- the one thing that will hold its value if governments create so much new currency that those currencies lose their value. Taken to its logical conclusion, this means governments would eventually agree to once again use gold as the basis for their currencies, says James Swanson, chief investment strategist at MFS, a mutual-fund company.
That is a fantasy, he argues, because some powerful nations have relatively little gold and some gold-rich nations have little power.
The real fantasy is Swanson's "logical conclusion" that those who view gold (NYSEARCA:IAU) as "real money" must believe that governments will "eventually agree to once again use gold as the basis for their currencies." As a store of value, I would argue that many owners of gold -- and silver (NYSEARCA:SLV) as well -- view it as that which could be converted into whatever new form of currency comes about should the current fiat monetary system fail. Whether the new medium of exchange is a gold-backed currency or some new fiat currency, gold could be converted into that new medium of exchange at a value better than the failed fiat currency would be converted. There is a very long history of this being the case, and until proven otherwise, "the trend is your friend."
The other quote from Hough's article that I want to comment on is as follows: "Gold defies efforts to calculate its worth -- or even to describe how it behaves as an investment. That means there isn't a clear reason to invest in it."
Does gold behave all that differently from certain stocks or equity market indices? Does it make sense that a stock -- or any other asset, for that matter -- could be worth one price one minute and then several percentage points more or less than that a few minutes later, simply because of rumors about this bailout or that QE? Are heavily leveraged commodities (NYSEARCA:DBC) that seem to react more to rumors of stimulus and monetary easing than to anything having to do with the fundamentals trading at prices that indicate their true worth?
At the end of the day, something is worth what someone else is willing to pay for it. In a credit-addicted world where economies and asset prices are dependent on an ever-expanding pile of electronic cash to survive, it makes sense that people are turning to that which has stood the test of time when fiat currencies are mismanaged by those in power: gold.
Finally, just because you find it difficult to assign an expected monetary value to something using conventional asset valuation models, or just because you find it difficult to explain the fiat currency price movement of a store of value, doesn't mean there "isn't a clear reason to invest in it." It just means that you don't know how to value it and that you don't understand the reasons for the price movements. One ounce of gold can put food on the table today, and if history is any guide, it will put food on the table under a new currency regime as well. While several units of fiat currency may be able to put food on the table today, history tells us that under a new currency regime, that might not be the case. That alone is a reason to invest in gold. Some of us will recognize, accept, and react to this by allocating a portion of our portfolio to gold, just in case. Others will not.
Whether owners of gold, silver, or even platinum (NYSEARCA:PPLT) will ever need to convert their precious metals into a new fiat currency is something I do not know for sure. But one thing I am quite sure of is that until that day arrives, people with access to the financial media will continue to bombard investors with every conceivable reason not to invest in gold. And, if that fails, they'll likely resort to subtle jabs such as "Civilized People Don't Buy Gold."