Global Agenda: What about gold?

With gold, logic and rationality are cast aside in favor of a quasi-religious set of mantras – for or against.

stock market 311 (photo credit: GIL COHEN MAGEN / REUTERS)
stock market 311
(photo credit: GIL COHEN MAGEN / REUTERS)
There is no topic in the entire area of investments that generates as much passion as gold. Other topics have pros and cons, supporters and detractors. With regard to most “asset classes,” it is quite straightforward to see why they might be attractive, at least in certain circumstances, if not necessarily at all times. With gold, however, logic and rationality are cast aside in favor of a quasi-religious set of mantras – for or against.
Thus the “goldbugs,” as the pro-gold camp is usually and contemptuously called, start from a presumption that effectively invalidates the whole of orthodox investment analysis. They regard it is a given that a financial system not backed by gold (or, perhaps, another precious metal) is unsound and is doomed to collapse. All “fiat” currencies – that is, those issued by governments with nothing other than the declared support of that government to back them – will fail, because all governments debase their currencies. The whole of recorded history proves this, they assert, so that the outcome of the current system is a forgone conclusion: it, too, is doomed.
Until a few years ago, this was considered very wild talk, suitable for cranks, weirdos and assorted loonies.
Respectable and educated people didn’t talk that way because they didn’t think along those lines. Governments, especially democratic governments, do not debase their currencies or deliberately destroy their economies.
There are checks and balances. In particular, there are now central banks, whose main function is to prevent the kind of currency-destroying inflation that the goldbugs are so afraid of. In short, nowadays the thesis on which the goldbugs rest their case is anachronistic and irrelevant.
This argument carries little weight with dyed-in-the-wool goldbugs, because to them the modern central banks are not the guardians against inflation and currency dilution, but rather the primary perpetrators of this crime and hence are directly responsible for the destruction of the currencies whose value they are supposed to protect.
There is in all this a critical theoretical issue: namely, whether it is possible to manage a modern economy, let alone the entire global economy of today, on the basis of the gold standard as it existed in the 19th century, or any other gold-based system. Having mentioned this issue, I will now bypass it and move on to the more practical concerns regarding gold as an investment, especially in the current environment of global crisis.
It will be obvious from the foregoing that the number of outright goldbugs and of gold sympathizers has soared since 2007, as the global financial system has come under increasing stress and numerous banks and then entire countries have proven to be totally unsound and hence untrustworthy. The siren call of the goldbug – trust no bank and no government, hold your hard-earned money in the only “real currency” available – has become more attractive with every passing day.
The discussion has thus moved to a more practical plane. Many investment advisers and money managers now accept that holding some proportion of one’s portfolio in gold – how large is subject to considerable debate – makes a lot of sense. The result has been a significant increase in the amount of money flowing into gold. However, the greatest strength of the goldbug case is that the supply of gold is very limited and it increases very slowly, at a known pace each year (the amount of “new” gold dug out of the ground). A massive increase in demand for a commodity the supply of which is very limited has caused – would you believe it? – a huge increase in the price.
In 1999, the price of gold bottomed at a generational low of about $250 per ounce. Today it is over seven times as high. This has caused a split within the swelling ranks of goldbugs: between true believers, who are convinced the price rise is more than justified by the degree of fiat money creation (“printing”) being undertaken by governments around the world, and that therefore the price will, nay must, rise much further; and, in the other corner, pragmatists, who say gold is a useful asset in terms of providing protection against governmental irresponsibility, although its usefulness is not absolute, let alone semi-divine, but rather relative to its price.
The debate has become steadily more intense and more interesting. In his latest letter to shareholders in his company, Berkshire Hathaway, the legendary investor Warren Buffett laid out the case against gold in very sound, rational and convincing terms. He had this repackaged as an article for Fortune magazine that ran in early February, and reading one of these versions (at the websites of Fortune and Berkshire) is highly recommended.
Buffett’s main contention is the classic anti-gold argument: It is sterile, and it generates no income because it produces no wealth. Instead, Buffett recommends fertile farmland, or top-quality companies with solid products and a large and steady dividend (no, not Facebook). These have proven and will prove again to be better protection against any economic disasters, whether inflation or deflation, or even wars.
Buffett’s broadside spurred a range of responses from goldbugs in the US and elsewhere, some of them serious, cogent and analytical. For instance, that it is possible to generate an income stream from gold by lending it out in the large and liquid market for borrowed gold. The debate is intensifying, in line with the degree of concern about national economies and fiat currencies. You can believe this or that dogma, or you can listen, think and become convinced one way or the other. But remaining aloof is not an intelligent option.