Seriously, I should have written it into his contract. He’s been working for the Funds Management business three months and gold bug Gareth Brown is already harping on about the barbarous relic. Bristlemouth used to be a forum for sensible investing ideas.
When I was in high school my best friend, Rumbles, made the Australian School Boys Rugby League team. Another mate’s indigenous cousin from a nearby town rocked up to the local bakery while we were having lunch one day and sought Rumbles out:
“So, Rumbles, I hear you made the Australian team?”
“I did mate, thanks”
“Yeah … well … I’ll beat you running”
This is how the gold bugs argue their case. So what if gold doesn’t generate a return? It’s better than cash. Therefore you should own it.
Yes, gold is better than cash as a store of value. But it seems we all agree that there are far better income generating stores of value out there, like property and shares. So gold is an inferior asset class as a store of value.
What about as a source of liquidity? Gareth quoted Einhorn running off a long list of things that he suggests make cash just as useless as gold. But there are lots of useful things you can do with cash. You can buy a hamburger with it. You can buy a house with it. With the click of a mouse you can instantaneously move it from one side of the world to the other. You can pay your staff or pay the rent. You can buy a plane ticket, get your mum some flowers or buy yourself some shares.
Gold can’t do any of these things. So how is it a superior source of liquidity?
Cash sucks as an investment, but so does gold. At least cash does something useful.
24 thoughts on “Why Gold Sucks”
You may be right Ludwig, and I have invested way more in non-Australian equities via our international fund than I have in gold. So my weight of money broadly agrees with you. But I don’t see why it is necessarily an either/or argument. The Australian dollar tanking would be good for my international equity exposure and good for my gold (in an AUD context). And if the AUD tanks at the same time as global equities, like we saw in 2008, then my gold hedge will prove even luckier. As usual, for me it’s about preparation more than prediction – gold is part of my disaster insurance policy rather than a high conviction bet.
Thanks for the complement – you certainly overrate me but I’m flattered nonetheless. I promise to blog an about face if I ever arrive at the conclusion that you and Steve were right all along.
I was thinking about the recent trends with the cheap rings and bright neck jewels increasingly worn by trendy Gen Ys. I’m not sure if it’s just me but I could imagine the trendiness of wearing gold reducing over time. Not sure if this would move the needle as far as the perceived value goes but if it loses popularity as jewelry, what else would it be used for?
Gareth, that’s quite an interesting view to have for someone who works in an Australian based stock picking firm.
If gold is seen as a protection of value, then you need something to protect you from. American goldbugs really have two-dollar linked prophesies: (1) a near-term fear that the American dollar will devalue due to rapid printing and (2) a long-term fear that this printing will spur an exploding inflation rate (fair enough on both accounts!).
Thus, ‘the unprintable cube’ is meant to protect such gold-groupies against both these fears. As an Australian, with the dollar dancing above parity, real interest rates that are actually positive, minimal public debt (compared with the US), a monetary policy outlook thats more ‘conventional’ and inflation targeted – the idea of hoarding gold as opposed to taking this once in a lifetime opportunity to purchase quality assets (or hamburgers) from around the world would leave even the entire Austrian School of Economics scratching their heads over the enormity of this folly in reasoning. It always pay to watch the smart money, but under what context? Baupost also holds Genworth Financial, so should we Australians mirror this doyen and buy Bank of Queensland? Obviously, in every case, it pays to examine the underling purpose of their investment and see if it even vaguely applies to us.
Australian investors, whilst suffering from ‘Einhorn-did-it-itis’, are perhaps even better off piling in to Amazon.com stock, at a P/E of 100, as a store of value (an asset whose investors also only gawk at capital gain/”capital preservation” as opposed to cash flows). Like gold, Amazon too can match inflation by raising prices to an extent. Yet, unlike an investment in gold, Amazon has this accounting entry called ‘earnings’ and it even has a management team to interview (a value investor’s favourite!). More philosophically, at least punters of Amazon are in some (indirect) way participating in an enterprise trying to change the way the world works in some productive way.
If investing is all about risking today’s dollars in order to earn more future dollars over and beyond opportunity costs, then buying gold certainly covers the first part of that definition – in that risks ALL of our Australian dollars today, yet in what possible lens does it even have the faintest hope of returning more Australian dollars to us in the future above all it’s wonderful opportunity costs available to us now?
Gareth Brown, you are an incredibly smart man. Smart enough to one day figure out Steve Johnson is right.
P.s. This is more addressed to the Australian-based goldbugs. I understand Gareth lives overseas and so what I say doesn’t apply fully to you – but hey, thats your problem not ours!
Gareth, I wonder how you came up with 1% gold / 25% cash ratio?
Why not 2% gold and 24% cash? Or 10% gold and 16% cash?
If gold is good, why limit yourself to 1%?
At the heart of value investing, the most important thing (in my view) is the price you pay. While the intrinsic valuation of gold is difficult (impossible?), for an asset that has enjoyed a 10 year+ bull market, coupled with unprecedented money printing, gold at ~US$2,000 looks like there is a lot baked into the price (there is obviously some hindsight bias here).
In what is ultimately a highly speculative asset (you are buying it and hoping to sell it at a higher price to someone else as it produces no cashflows), it seems strange that none of the gold bulls talk about price in the context of value (other than it is going to continue to go up).
For those interested in Jim Grant’s latest views, try this video.