The Practical Economist


GOLDWhy is it different than other investments?


If there is one thing that can be universally agreed on about Gold, it’s that everyone has an opinion and those opinions vary widely.

Many view Gold as not much more than a commodity, useful in industrial and cosmetic applications.

Some view Gold as a hedge against Inflation.

Some view Gold as a long-term store of value and the ultimate currency.

Put in context of the world’s highly-valued commodities, Gold is still, in many ways, the figurative gold standard.  There are Diamond, Platinum, Palladium…and other rare metals.  But it is still Gold that tends to be viewed as the most coveted store of value on a global basis.

Currency systems have changed enormously over the past 2000 years.  There is no denying the fact that Gold has been a constant to a great degree.

Take Gold as a fundamental element of jewelry.  Gold is still desired greatly as jewelry as it’s considered to be beautiful.  It is also considered, particularly in some regions, as a way of storing and preserving wealth.  It’s not a coincidence that much jewelry is designed so that it contains many small elements within the greater that can be easily detached from the whole, for the purpose of selling or exchanging.

We know many people, primarily those who work in financial services, who view Gold as largely irrelevant.  If you ask them what Currency is, they will say that Currency is the medium in which you pay your taxes.  That’s a very seductive-sounding argument.  But, it’s flawed.

For one thing, it ignores the fact that currencies change…often because of political regime change, sometimes a result of violent overthrows of regimes.

For another, it ignores the fact that not all currencies are equally valued by all people.

The simple fact is that Gold has been—still is—a store of value that has a greater track record of long-term desirability, acceptedness, and stability in keeping (and growing) value than any other currency.

The fact is that, as a country and as a world, we have not settled what Currency is.   The fact that Richard Nixon permanently disconnected the link between the money stock and the nation’s supply of Gold simply exacerbated things.

Less than a hundred years ago, you could walk into a Federal Reserve Bank with a ten-dollar note and ask for it to be exchanged for a legal-tender coin made of gold that was its monetary equivalent.  In 1933, Franklin Roosevelt made the possession of gold by private citizens illegal.  However, the amount of money printed by the Treasury still could not legally exceed the value of Gold held by the U.S. Government.  

The Nixon Administration changed that.

That $10 bill you now hold in your hand…it’s exchangeable for two five-dollar bills…or, if you’re looking for tangible value, you could get 40 quarters, which contain a supply of Nickel, another relatively desirable commodity.

Our view on Gold is simple and two-fold.  The simple part of the view: Gold is, indeed, a commodity and responds to changes in supply and demand…the demand being based on its use in industrial applications and jewelry.

The second part of our view is more complex: many people, especially those who dismiss Gold as an investment, will tell you that Gold is a foolish investment because there’s no tracking or understanding the reason for fluctuations in Gold’s price.  We disagree.  

Gold is still the world’s ultimate store of value.  When the financial credibility of major global players is undermined, Gold benefits in proportion.  When fiscal budget deficits are high and rising, especially when industrial and retail sectors are under pressure, the currencies of those countries come under pressure and many, many people turn to convert their wealth to Gold.  (Keep in mind that some portion of that demand for Gold in jewelry is related to many regional people’s preference for keeping their wealth in Gold.)

The fact is that Gold is your ultimate hedge against political and currency turbulence.

For this reason, we consistently advocate some allocation of your wealth, in an amount appropriate for you, in Gold.

The amount that’s appropriate for you?  That depends on a variety of factors, including the size of your portfolio, how liquid it is, risk exposure as it relates to country, risk exposure as it relates to currency, and, of course, your personal prejudice with regard to political and currency stability.

For most people, the appropriate amount is somewhere in the range of 5% - 20%.  The higher the risk in your portfolio, the higher the percentage that we think should be allocated to Gold.

We understand the view of those who dismiss Gold as the ultimate safe haven or the ultimate currency.  However, we challenge these people to tell us what form of value is (1) more widely accepted  (2) physically unchangeable and (3) permanent as a long-term type of currency.