In the long term commodity investments are a sucker's bet. A bet on rising commodities prices is a bet against human ingenuity. Commodity prices should always go down in real dollar terms over the course of complete market cycles. Why? Because they are generally cheaper to produce, because over time human ingenuity will lower the cost of production through innovation, or find new substitutes for scarce resources. Think of the colonial spice trade, whaling, crop yields per acre.
Gold, however, is different from other types of commodities. Yes, it has some function for jewelry, but even in this context its primary function remains a store of value. It is not useful and it does not generate any income. It isn't an investment like stocks or bonds. Gold is the one investment you can make that reflects your views of American politics.
"Price stability belongs on the social contract. We give the government the right to print money because we trust our elected officials not abuse that right, not to debase the currency by inflating… Failure to maintain those promises undermines trust in America. And trust is everything." - President John F. Kennnedy
Enduring commitment to gold as a store of value is a threat to the reserve status of the US dollar. If the dollar loses its status as the world's reserve currency, then the US government loses the privilege of printing money to resolve debt through inflation. In this sense, gold is essentially the anti-dollar. Betting on higher gold prices is a bet against the US resolving its current fiscal concerns. In so far as buying gold is a bet that US policy fails, buying gold is un-American.
The United States has a debt problem. The current policy has been to reflate our way out of this debt problem by holding interest rates at near zero and by the purchasing of mortgage backed securities to influence house and stock prices. It is policy makers hope that asset inflation will jumpstart the economy. As the purchasing power of the dollar declines, you are incentivized to increase consumption. By purchasing a permanent store of value like gold, rather than consuming, you are undermining the purpose of the current Fed initiative, which is to encourage immediate consumption, and thus economic activity.
In spite of the Federal Reserve's continued quantitative easing, interest rates have been rising recently. One of the many contributing factors to the recent rise in rates is that foreign central banks are diversifying out of US treasuries and into gold and other currencies. The most recent Treasury department data has shown increased net sales of treasuries by foreign nations. This makes sense since foreign central banks have to hedge against the threat of rising interest rates and a decline in the purchasing power of the dollar.
"The more gold a country has, the more sovereignty it will have if there's a cataclysm with the dollar, the euro, the pound or any other reserve currency." - Evgeny Fedorov - United Russia Party
Central Banks bought more gold in 2012 than in any other year since the US abandoned the gold standard, a net 536 tons. This is either a symptom of buying into a bubble at the top, or indicative of a move to hedge against the US dollar. If the dollar is to remain the world's reserve currency then all alternatives are a threat. The US can't buy gold without discrediting its currency, no other country has this problem.
The Chinese authorities have been pushing for a more international role for their currency and for an alternative reserve currency to the dollar. Bilateral trade agreements using the Yuan are being established between China and many nations. The list of countries with Chinese trade agreements continues to grow as dollar transaction around the globe slowly erodes. According to HSBC, the amount of cross border transactions in Chinese Yuan is estimated to increase to a third of all Chinese transactions by 2015. As there will be less need for dollars in global trade, the reserve status of the dollar will erode over time.
Any hard asset denominated in dollars will rise in price when the purchasing power of the dollar declines. Gold is just one of the more common assets purchased by investors, but real estate and infrastructure assets function in much the same manner. Gold is just easier to buy and sell in smaller priced transactions than are houses.
Gold serves a unique political function as a vote of no confidence in American politics. What are your views on the long term purchasing power of the US dollar and its status as the world's reserve currency? How do you feel about Federal Reserve policy? Are you worried about the fiscal cliff or another financial crisis? You can express those opinions by owning or avoiding gold.
I don't own any physical gold, but I have no problem with in investing in companies in the commodities space. They create value by refining products, creating efficiencies in distribution, financing production, etc. Investors worried about the continuing status of the dollar as the world's reserve currency and the longer term decline of the dollar's purchasing power should take the time to look into Dundee Corporation (OTCPK:DDEJF). Dundee is a unique conglomerate providing investors access to a mix of traditional and nontraditional asset classes, including gold and real estate investments.
Ned Goodman, founder and CEO of Dundee, is focused on inflation as an investment theme. "I don't wait for inflation," he said. "It's only a matter of time before currencies lose value and inflation rises. Our whole investment modus operandi is to get involved in those industries and companies that will gain from an inflationary event."
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.