Putting The 'Bull' In Bullion: What Happens To Gold's 'Intrinsic Value' Post-Apocalypse?

Jun.15.12 | About: SPDR Gold (GLD)

One of the primary criticisms leveled at investors in "paper gold" (SPDR Gold Trust ETF: GLD) is that in a doomsday collapse-of-civilization scenario, paper holdings will become worthless. Only physical gold bullion will have "intrinsic value" in the case of some doomsday scenario. This statement is promulgated as fact by just about every website advising investors to buy gold. To quote one of the popular ones, the pros of physical gold include:

  • Most security (and growth potential) in worst-case scenario
  • Can be used as currency to make purchases, if necessary
  • Has intrinsic value; will never be zero

But here's my question: in the real "worst case scenario," does gold actually have intrinsic value?

After Armageddon: The Postapocalyptic World

For this analysis, I'll be making an analogy to a movie called The Book of Eli. If you haven't seen it, it's okay - I'll give you a basic outline.

The "world as we know it" has been destroyed by an apocalypse, the exact details of which are never revealed. The entire country is a barren wasteland: cracked freeways, dust storms, etc. Your "property" is what you can carry around in your backpack - and if you run into the looters, good luck. Food is rare, water even more so. Medical supplies are rumored to exist, but then again, so are chupacabras.

This is the end of the world, with no corporations, no governments, and no currency. And isn't this what the prepare-for-doomsday investors are expecting? After all, for us to revert to using gold as primary currency, we'd have to see a global collapse of all structure and order. (I guarantee you that Johnson & Johnson (NYSE:JNJ) is never going to report its quarterly earnings in ounces of gold.) My point here is that for gold to have "intrinsic" value not tied to a currency or economy, you'd have to see the end of the modern world.

So back to the movie. The protagonist, Eli, is walking across the country. He rarely sees anyone else, and when he does, chances are it's a looter/thief. (Then he slices off their heads with a machete. But I digress.) Eli's primary needs in this post-apocalyptic world are food and water, and I'd imagine that just about everyone left alive shares those needs.

Now tell me. In a situation like this, when you might not find food for days, which is more valuable to you - a pack of crackers or a kilogram of gold bullion? I'm going to go with the pack of crackers. Especially since my backpack's only so big, and I'm walking all day without food or water, and gold's kind of heavy.

"But wait," the gold bug says. "The gold can be used as currency, and traded for crackers."

In the world of Eli, who in their right minds would trade crackers for gold? I mean, don't get me wrong. Gold is shiny and pretty, and if I was a billionaire, I might buy a literal ton of gold just so I could say I owned a ton of gold. But the argument that gold has "intrinsic value" as currency doesn't hold up. Things like food and water are basic human needs, and in this post-apocalypse world, you can reasonably see people bartering with such commodities. (I'll trade you three packs of crackers for two bottles of water. I'll trade you a bag of beef jerky for two packs of crackers. So on and so forth.)

But does gold fulfill any inherent human needs? Not really.

So for gold (or, for that matter, silver - iShares Silver Trust ETF: SLV) to be used as a currency, there has to be some semblance of order and society - just like there has to be order and society and a "system" for people to routinely trade in the denomination of dollars, euros, yen, etc. In Eli's world, there's no guarantee that you'll meet another person who you CAN trade that gold with - and, of course, no guarantee that that person will be foolish enough to trade food and water (things with real intrinsic value) for gold (something with little intrinsic value, post-apocalypse.)

So the gold bars you're storing up won't actually have any of this so-called "intrinsic value" at the end of the world. They may well have value when society is slowly rebuilt, but in the meantime?

Forget about it.

(For what it's worth, if you have money to burn and you're paranoid about the end of the world, here's my advice: buy a lot of farmable land out in the middle of nowhere. Build a super secure underground bunker, and fill it with truckloads of water and non-perishable food. Grow a farm over the bunker. You now have things with lots of intrinsic value: food, water, and shelter.)

Disclosure: I am long SLV.