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Gold is not an investment
Richard Beddard has been annoying the gold bugs. This puts me in the unusual position of agreeing with him.
Gold is very like a fiat currency (Willem Buiter calls it a “fiat commodity”), in that the value is the result of:
- common agreement, by custom, that it has value
- scarcity induced by huge stockpiles
Even its most common use, in jewellery, is the result of its cost: it is used not because it is really any prettier than brass, silver, titanium or various alloys, but because is is more expensive. Gold is the oldest luxury brand.
There is no guarantee that gold will keep its value. Its long term performance in inflation adjusted terms has been terrible.
One comment that I keep seeing is “there cannot be a gold mania because I do not know anyone who has invested in gold”. All that proves is that you do not know the people who have been buying gold.
It is true that private investors in developed countries hold little gold. So who does hold it? A lot of institutional investors, central banks, and private investors in developing countries. The last are critical. Private holdings of gold in India alone are estimated to be 15,000 tonnes — as much as the four largest national official reserves of gold combined. Remember how sales by Indian investors wrecked Warren Buffet’s speculation in silver?
Gold is a traditional store of value in countries like India because of the lack of alternative investments (land is illiquid and you cannot buy small amounts, banking and broking are still not universally available). As these countries develop is it likely that holding of gold will fall, as alternatives emerge.
Of course you can make a profit on gold. You can also make a profit in a casino. The odds are better on gold as there is no house advantage, but ultimately gold is not an investment, it is a speculation. It can be very profitable if you can get your timing right. Currently, it is a bet against economic recovery.
Comments(3)
I think the first line is missing from your blog Graeme, but this is a most welcome intervention! I like the idea of a fiat commodity – hadn’t heard it.
PS In the spirit of Christmas I think we are in agreement more often than not. We come at the same problem from different ends and often nearly meet!
I believe the prices of gold and silver were very close in the early part of the 20th century. Currencies were pegged to both. Then there was a dramatic collapse in the price of silver. Can that happen to gold?
Some interesting stuff on precious metals:
http://www.economist.com/blogs/freeexchange/2012/02/hedges
http://www.economist.com/blogs/buttonwood/2011/03/commodities
http://www.economist.com/node/17151109
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