Sure, it may glitter but is it really gold?
Gold can often seem like a safe haven, but there’s more to it than meets the eye.
Ishould have seen this coming. Last week’s column, which discussed the possibility of a bank failure, brought the gold bugs crawling out of the woodwork.
Gold enthusiasts love doom and gloom. When the world is looking especially chaotic, they rub their hands with glee. Economic collapse or a Donald Trump apocalypse would be great news for the price of gold, sending investors scrambling to buy it up.
Gold is the currency of fear, favoured by those who don’t trust banks, paper currencies or governments. A big old nugget of gold has a reassuring solidity to it. A thousand years from now, you know it’ll still be there. It’s a cold, metallic security blanket.
For this reason, gold is sometimes considered a ‘safe haven’ investment. As we learned last week, there’s no such thing. What’s really surprising is just how volatile the precious metal is.
Gold bugs have had a whiteknuckle ride in recent years.
The financial crisis sent the price soaring from as low as US$733 (NZ$1041) an ounce to around US$1900 a few years later. Analysts reckoned US$5000 was surely on the cards. Then the price crashed, bottoming out just above US$1000. Now it’s climbing.
Investing in gold can make you very, very rich. If you time it right, your pockets will be so full you’ll have to hire two assistants just to hold your pants up.
Investing in gold can make you very, very poor. If you time it wrong, you’ll count yourself lucky to still own a pair of pants.
Gold has some uses, like in electronics and jewellery. Mostly, it just gets hoarded. That means the main driver of the price is the behaviour of human beings; flawed, irrational and unpredictable as we are.
Maybe you get the timing right, and maybe you don’t. At the very least, you’d hope gold would hold its value over very long periods compared to currencies which tend to lose value through inflation.
Volatility is not unique to gold: stock and property markets boom and crash too. The main objection from the anti-gold camp is the lack of ongoing returns. Gold sits in a bank vault, a safe, or perhaps a hole at the bottom your garden. Unlike investments earning some sort of dividend, interest or rent, the only thing it accumulates is dust.
In Warren Buffett’s 2011 letter to shareholders, he imagined all the gold in the world, joined into a cube of about 20 metres a side. The value of that big lump of metal could buy all the cropland in America, plus 16 Exxon Mobils, with about US$1 trillion of pocket money left over.
A century later, the 400 million acres of farmland would have produced staggering amounts of crops, and the companies delivered trillions of dollars in dividends. Buffett points out that meanwhile, the pile of gold would be the same size, and still incapable of producing anything: ‘‘You can fondle the cube, but it will not respond.’’
Including a small portion of REUTERS gold in a balanced investment portfolio may not be the worst idea in the world. Just don’t let the allure of the shiny stuff brainwash you into becoming a full-blown gold bug.
Got a money question you’ve been struggling with? Want to send a bouquet or a brickbat? Email Budget Buster at meadows182@gmail.com or hit him up on Twitter at @MeadowsRichard.
‘ Gold bugs have had a whiteknuckle ride in recent years.’