By Stefan Gleason
Gold attracts its fair share of detractors. But the most common objections to gold as money, and as a safe-haven asset within an investment portfolio, are misplaced. Anti-gold myths are ubiquitous.
Gold attracts its fair share of detractors. But the most common objections to gold as money, and as a safe-haven asset within an investment portfolio, are misplaced. Anti-gold myths are ubiquitous.
Mega
billionaire Warren Buffett remarked derisively of gold that it “gets
dug out of the ground in Africa, or someplace. Then we melt it down,
dig another hole, bury it again, and pay people to stand around
guarding it. It has no utility.”
That brings
us to the first thing precious metals naysayers get wrong…
Myth
#1: “Gold has no utility.”
Warren
Buffett is without question one of the world’s greatest investors.
But he is not without biases.
Buffett’s
primary business interests are in banking and insurance.
He has
literally made fortunes off the fiat monetary regime. He took part in
(and benefited from) the government bailouts of the financial system.
He (along with most other Wall Street and banking titans) supported
Hillary Clinton for president.
So maybe,
just maybe, Buffett’s hostility to gold has something to do with
his deep, symbiotic connections to the political, banking, and
monetary establishments!
In any
event, the claim that gold has no utility is false. It's been chosen
by the market as money because of its many useful features, including
fungibility, divisibility, durability, and rarity. Gold also
functions as a store of value precisely because it, unlike Federal
Reserve notes, has uses beyond that of a currency.
Even if
gold weren’t hoarded in vaults, people would still dig it out of
the ground at great cost for its uses in electronics, jewelry, art,
and architecture. In an economic sense, $50,000 in physical gold is
just as useful as a $50,000 sports car – as determined by the
market.
Myth
#2. “Gold is the money of the past. Digital crypto-currencies are
the money of the future.”
Every
generation comes up with some new reason to regard gold as a
“barbarous relic.” Previously it was the advent of paper money.
Then the creation of the Federal Reserve. Now the rise of
internet-based crypto-currencies is hailed by some as a technology
that will render gold obsolete as money.
The reality
is that no paper or electronic or currencies ever have or ever could
replicate the unique monetary properties of gold. Central banks
continue to accumulate it. And new crypto-currencies actually backed
by gold and silver are in the works.
A
crypto-currency that combines the convenience of digital transactions
with the security of metals backing could ultimately knock Bitcoin
off its perch – and be a source of billions of dollars in new
demandfor gold and/or silver.
Myth
#3. “Precious metals markets can’t go up while the Fed is raising
interest rates.”
This
persistency of this myth is surprising given how often in market
history it has been dispelled. Gold prices hit a major bottom in
December 2015 just as the Fed initiated its first interest rate hike.
Gold and silver rallied big during the rate hiking campaign from 2014
to 2016. Back in the late 1970s as interest rates rose dramatically
into the double digits, gold prices rose in tandem – until,
finally, nominal interest rates actually exceeded the inflation rate
by 1980.
The
direction of the gold price is keyed into real interest rates, not
nominal rates. When real rates are negative or inflation expectations
are rising, that tends to be bullish for precious metals.
Myth
#4. “If the economy crashes, then so will gold.”
Gold is one
of the least economically sensitive assets you can hold as an
investor. The yellow metal exhibits virtually no long-term
correlation with the stock, bond, or housing markets – and a
relatively low correlation with industrial commodities such as oil
and copper.
When every
sector of the stock market including mining stocks crashed in 2008,
gold itself managed to eke out a positive gain for the year. Gold
isn’t impervious to economic shocks that may affect things like
demand for jewelry, but safe-haven buying by investors is often more
than enough to pick up the slack.
Myth
#5. “Ordinary investors can’t win in gold and silver markets that
are manipulated.”
A
distinction needs to be made between physical metals markets and
manipulated paper markets. Most of the manipulation that occurs in
futures (paper) markets is done for short-term technical purposes –
to game a few cents on bid/ask spreads, break resistance levels,
force options to expire worthless, etc.
Ordinary
investors absolutely should not try to trade the paper markets. They
won’t beat the big banks and other institutional traders at their
own game.
To the
extent that paper prices are artificially suppressed, however, that’s
actually an advantage for buyers of physical metal.
They can
obtain it at a discount.
Meanwhile,
artificially low prices serve as a disincentive to new mining
production, which makes the long-term supply/demand fundamentals for
gold and silver even more favorable.
Myth
#6. “Gold pays no interest so it’s therefore a poor investment.”
Warren
Buffett’s Berkshire Hathaway shares pay no interest or dividends.
Venezuelan junk bonds yield more than 50%. Which is the better
investment?
Obviously,
the size of the nominal yield doesn’t in itself tell you whether a
financial asset is a good investment. Even the “safe” yield
provided by U.S. Treasury securities isn’t safe from inflation. Or
from taxation.
Since
physical precious metals aren’t debt instruments and therefore pay
no interest, their inflationary upside potential is all tax-deferred
growth. You owe no taxes until you actually sell (or take
distributions from a traditional IRA).
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| Stefan Gleason |
Images: Author owned and licensed
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