Gold has been pounded for the past few weeks and there are many that wonder why. I am among them, although I think its fall should be expected. The current malaise seems to be unattached to any fundamental part of the “gold as value” story.
Gold is historically a way to store wealth independent of government action. It is conceptually a defence against governmental fiscal foolishness. While the foolishness is evident, the defence aspect of gold is less clear, at least to me.
In our ill-managed world, the US government still runs amazing deficits financed with promises that are becoming less and less credible. Therefore own gold according to the metals crowd. The inference presented is that paper money and other instruments will be valueless and gold, silver and platinum are the salvation.
There is a basic English language problem with this. Inference and implication are not interchangeable. The metals crowd uses economic facts and infer that the runaway inflation is outcome and gold the solution. But, infer requires evidence and none is presented about the connection of the economic foolishness and the efficacy of gold as a solution. If understood properly, we should notice that the advertising and reporting “implies” the two outcomes of economic chaos and gold as saviour.
We know that the observer is, in most cases, uninformed, and we know further that the supporting information is one-dimendional. In this circumstance presentation as an inference is very powerful.
The same technique is used in other propaganda ads, political for example. As a general rule, an inference presented without the evidence is a lie.
On November 5th, the Financial Post inferred that the price of gold is falling because demand for the material in anticipation of Chinese New Year is lower than it has been in previous years. That seems awfully thin to explain the present malaise. Nonetheless it is a valid inference, albeit not necessarily truth. There is no requirement that an inference be right, just that there be evidence to support it. I might disagree with the Post, but I would need to do so in a fact based way.
Assuming the Post’s inference is correct, there is an obvious question. “Why would I want to tie my financial well-being to the demand for a raw material used to make jewelry in Asia?”
I have no problem with commodity based security. I just have a problem with the hyperbolically named “precious metals.” I might wish to tie my security to more reliable commodities. Maybe wheat or rice seeds. Maybe fertilizer. Maybe building materials or baby clothes. Maybe farmland or a forest.
Precious metals are convenient, (It is hard to get change if you try to exchange a forest for a tank of gas) but I cannot see the metals are worth the premium they presently command. In terms of purchasing power, gold is worth now less than one half of what it was at its peak in 1980. Even its interim peak was less than 80% of the 1980 value. In the subsequent 35 years, both of those markets have done immensely better than gold. How good a hedge is that?
Maybe owning some gold allowed people to invest fearlessly in the stock and bond market and if so, then it has a value. A form of insurance if you like. That value is not monetary. It is comfort. Comfort costs. By the ounce, Prozac may be less expensive.
As with other forms of insurance, there is a value if owning it allows you to do things that have value and that you could not have done without the insurance.
Own a little if you must, but be prepared to lose some money doing so.
Don Shaughnessy is a retired partner in an international public accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario. Contact: firstname.lastname@example.org