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Gold: Some Interesting Arguments

|Includes: SPDR Gold Trust ETF (GLD)

Over the months which I have been a passive reader of articles in SeekingAlpha, I have been reading about the arguments regarding the value and utility of Gold. Mainly, there are 2 camps: the gold Bugs and the ... Gold Pesticides (anti-gold)?

In this article, I want to go into a few selected arguments which, incidentally, is in favour of the gold bugs.

Value and Utility of Gold

Allow me to start with a story from my ex-colleague.

In my country, Singapore, we have uncles selling ice-creams on motorbikes which usually costs $1. When my colleague was very young, she used to buy from an uncle who frequented her area. She will always pay the uncle in $1 coins which she had a lot that were given to her by her relatives and the uncle was always very happy to do business with her and always gave her extra servings of ice-cream.

It was only when she was older that she knew the reason why. She had always paid for her ice-cream using gold/silver collectible coins minted from the Singapore Mint. These coins are worth substantially more than the face value of the coin and their value grows with age.

In the comment section of a recent article, I see gold pesticides argue about how those collectible coins can only still buy the number of Big-Mac based on their face value. In an older article, I read about how a grocery stall cashier will not take a gold bar for the groceries that you purchase. In both cases, "stupidity","ignorance" or "indifference" can be the theme. In the former case, it is applied to the payer of the big mac, in the latter, the cashier.

The fact that someone is not able to value something doesn't make the subject worthless. One needs to ponder about why are all the attention given to gold and silver but not collectibles like diamonds? And gold does have a price and many historical and modern economical value. Without gold, fiat money cannot be properly priced. This is true regardless of the economies that you are in. Without gold, continued printing of fiat money will trigger hyper-inflation. Is it really true that USD is valued only because it is backed by the full faith of the federal reserve? To trigger the thinking about this question, let me go ahead with the second argument presented by the gold pesticides.

Royal Bank of Canada no longer holds Gold

One of gold pesticides' favourite example of the "worthless-ness" of gold is to quote that RBC no longer holds gold. I will make this short.

Do you know that Canada is the fifth largest producer of gold in the world? USA is 4th. Do you need to hold gold in your bank with you have gold in your ground that you can dig up when you need it?Ignorance of this fact is mistake that most people make.

Warren Buffet is against Gold

Now, if one just take what WB says at face value, then it is the equivalent of taking a gold coin with $1 printed on the face at face value. Understanding the context in which he made the statement is important. Being given the title of "The Greatest Investor", we will certainty not be naive enough to think that WB can't value precious metals.

Around that time, in 2011, gold was above $1900. Gold was "Hot" on the financial menu. Individuals were chasing gold price. It was a euphoric state for gold. Gold-related investment schemes were peddled by financial salesmen. Being WB and having being in the financial markets long enough, he knows that gold is overvalued just like the South Sea Bubble or the Tulipomania and thus he gave warnings publicly knowing that people will listen to him.

Think about the time during the Dot-Com bubble where he openly criticized the technopreneurs. Did he really think that tech companies are useless and worthless? He merely use them as a tool to warn against euphoria.

Gold is useless, it doesn't produce anything

Continuing from WB, here is a part of his saying also. As I've explained in the previous section, we need to read WB's saying in it's proper context. Given that this sub-argument has branched out and had became an independent gold pesticide's weapon, let me tackle it independently.

Gold, in many eastern culture, holds a value that presents purity and "true" value. Gold jewelleries are the traditional items given during marriage and there are many "old sayings" that uses gold, just like english saying "as good as gold". To many parts of the world, gold also provides jobs that sustains livelihood. Miners, Jewellers, traders, etc. With mining cames the companies that makes the drills or the geologists who tracks the gold veins. I can go on, but you get the drift. I'm sorry, I like to be as short as possible assuming people will do their own thinking. If they don't, they are not my target audience.

Gold Value in Times of War

To people who argued that gold doesn't have a value in times of war clearly doesn't study history or think that this time it is different. Else, they have never had war on their soil before. When war comes to your soil, you will know how valuable gold is in exchange for food. Bitcoin will most likely be the useless one because you need electricity to log in and transfer your bitcoin. If war in on your soil, I can assure you that electicity is a scare resource because energy commodities will be expensive and more inaccessible and thus electricity will be rationed. You won't be surfing facebook or reading seekingalpha. Gold can save life. Don't ever forget history even if you think that the next war will not be like the last. What you can hold in your hands will be more valuable than what you can access online because not everyone will be able to go online.

Gold doesn't give dividend

Actually, it should be with earlier section but I am too lazy to go back and edit so I present this argument here for you. If any financial advisors gave you this argument (as many financial advisors/consultants/etc. in Singapore does), DO NOT USE their service. Because they can't value something because it doesn't give dividend doesn't mean something is worthless! Revisit my first point please. And, Finance 101 teaches us that there are 2 components to investment: dividend and CAPITAL APPRECIATION. How can they conveniently ignore the second component just because it wasn't offered on their menu?

Wait... let me see... the Tech Unicorns like Facebook, Amazon, Google don't give dividends early in their growth stage... they are worthless... Berkshire Hathaway....

Conclusion

Be open-minded and always do your homework. Context is important.

Additional disclosure: This article does not give investment/trading advice but seeks to educate the public.