Broker Check

August 2016 Perspective: Gold

August 26, 2016
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In certain finance circles gold is held in such disregard that it is commonly referred to as a “barbarous relic,” seen as having absolutely no reason to own. Interestingly, the term “barbarous relic” was actually coined in reference to the monetary system at the time, not the metal itself:

 

“In truth, the gold standard is already a barbarous relic.”

  • John Maynard Keynes, Monetary Reform(1924), p. 172

Perhaps even more interesting is fact that the monetary system has required a substantial change every 40 years or so and the last such change occurred in 1971… There are many who would call our current system a relic and are advocating serious change, but that is a story for another day.

 

So what of gold right now? Does it have a place somewhere in your financial picture?

 

With gold off to its best start since 1980, we are starting to see and hear more about it in the media. Perspectives on the metal range wildly and seem to be more emotionally charged than perhaps any other asset. In this kind of environment it can very easy for one’s thinking to become clouded. We’d like to take this opportunity to discuss what gold is, and, what gold is not. This is our Perspective and we hope it provides some clarity on the matter.

 

Let’s start with what it’s not:

  1. Gold is not merely a barbarous relic. It has value in the modern world.
  2. Gold is not an investment. It does not produce anything. No interest, no earnings. Owning gold will not result in you having more gold in the future. In fact, you may incur a cost to own it in the form of storage fees or fund expenses, resulting in less gold in the future.

 

What it is:

  1. It is money as Aristotle first defined it: durable, portable, divisible & consistent, and it has intrinsic value. All paper currencies fail to meet the last part of the definition, which is why inflation can get out of control. Intrinsic value is the difference between money and currency. J.P. Morgan agreed (the man, not the bank):

“Money is gold, and nothing else” – J.P. Morgan

 

  1. Because it has intrinsic value, gold can be a form of insurance. Like any insurance, it has a cost. Like any insurance, it can offer some financial protection in a catastrophic event. So what is this catastrophe? Armageddon? Zombie Apocalypse?  No. Well, maybe if that’s your concern. But it doesn’t have to be anything that dramatic. We’re simply referring to losing your ability to buy the things you want and need because the currency you hold is worth less over time, a.k.a. inflation.

 

In our lifetimes inflation has happened slowly in the U.S., but it can also happen quickly. Did you know the US Dollar has lost well over 90% of its purchasing power since the Federal Reserve Bank was created in 1913?  Over that same time gold’s purchasing power has increased if you care about buying things like houses, cars, gasoline, lunch, postage stamps, or shoes to name a few examples. Whether it happens slowly or quickly, the catastrophe gold insures you against is the loss of purchasing power, which can accelerate when central bankers behave badly. See the attachment  Paper Currency to see some examples where inflation made paper currency worthless. In hindsight, do you think people in those countries would have been better off if they had some gold? That’s how gold can be insurance.

  1. Lastly gold is a vehicle for speculation, just like any other commodity. In its simplest form, a person buys a commodity expecting that someone in the future will be willing to pay more for it. Gold miners are commodity producers and offer leveraged speculation opportunities.

 

Whether or not gold has a place in your financial picture is up to you. We hope this enhances your perspective if you are considering where and how this particular asset might fit in. 

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