The fading appeal of gold
31 July, 2015
I hesitated before deciding to share my thoughts regarding gold. Last time I wrote about gold I had all sorts of gold fanatics tell me how clueless I was about the greatest asset of all time. All because I dared to suggest that it is not the safe, never-fail investment that it is sometimes made out to be.
I am prepared to suffer another backlash, because my view is unchanged and the gold price, which has fallen 8% this year and is now close to a five-year low, suggests that others share my view.
Gold is an intriguing asset. The textbooks have always pointed to gold being a universal legal tender, accepted virtually everywhere as a means of payment. Governments and banks hold it in safes and forts. It is the most precious of all precious metals. It acts as a hedge against inflation, and it is generally owned by investors for safety's sake as it may not fall in calamitous times the way paper currencies might.
There is a mystique about gold, and printed gold bars and molten gold are more visually appealing than other traditional assets!
As an investment, gold is not clear cut and there are as many detractors as there are supporters.
Gold doesn't meet the traditional criteria of an investment. Gold has limited intrinsic value, no cash flow, no earnings, no yield. Gold is generally owned by pessimists as a safety net, whereas most other assets are bought by optimists who buy shares, property or bonds because they think their value will increase in value.
Warren Buffett has said that gold's two biggest shortcomings are that it is not of much use nor does it produce anything. At a shareholder meeting in 2011 he compared the world's stock of gold (which is about 170,000 metric tons) with a bundle of productive assets of equal value. The productive assets included all US cropland (400 million acres producing $US200 billion of crops each year) and 16 Exxon Mobils (the world's most profitable company at the time).
Buffett suggested that in a century, the farmland will have produced staggering amounts of crops, and Exxon will have delivered trillions in dividends and will own assets worth trillions of dollars. The gold on the other hand, will be unchanged in size and still incapable of producing anything.
Gold investments should come into their own in times of uncertainty. The more uncertain the outlook and the bigger the crisis, the better the gold price should perform. Inflation, deflation, government borrowing or a plunging currency — whatever the concern of the day, gold is supposed to be a refuge.
But gold has not behaved as the text books suggest or the gold fans would have liked. After the most recent price slump, many are saying that gold has lost its lustre permanently.
We've experienced so much uncertainty in recent years — with low economic growth, the prolific use of money printing, European woes and the potential of a Greek default — you'd think gold would have easily been the best performing investment. Gold has not performed and it is hard to see what will change to restore gold to its former glory.
One commentator suggested recently that gold has been shown to be less an investment and more a religion! His logic is that gold supporters typically share a belief system — they believe that the outlook is negative and that owning gold is the only way to survive a financial or economic crisis. While the evidence from historic crises and corrections is inconsistent — sometimes gold has performed well, other times it hasn't — gold fans nevertheless continue to have faith and believe that gold will prevail. In many instances, they believe it so fervently that they become almost evangelical in promoting the virtues of gold. To this extent at least, gold can be likened to religion.
Regardless of its questionable investment credentials, gold has a substantial fan club, is traded regularly and from time to time, enjoys price rallies which can last a long time and are seemingly unstoppable. Until they stop.