Gold: Store of value | The Economist

I still get lots of calls from clients asking about gold as an investment.

I am not a big fan. I know gold historically has served people well during inflationary periods, or when governments do silly things like debase their currencies, but I think gold has several drawbacks.

First, it doesn't give you any yield.

Second, it really has no value other than for jewelry. As The Economist's article notes, even India is reducing it demand for gold jewelry, and they represent a quarter of the world's demand.

Third, it is almost impossible to analyze. Since most of the demand and supply of gold is based on human emotions, projecting gold prices in futures is even more futile than predicting the economy.

Fourth, even if Armageddon arrives as the gold bulls predict, what good would gold be then? Would someone be willing to take a metal for goods or services - or are they more willing to demand something more tangible, like food or shelter.

Finally, the track record of gold in modern times has been mixed, at best. As the chart in the attached article indicates, although in nominal terms gold has risen dramatically in recent quarters, on an inflation-adjusted basis gold's price is unchanged in nearly 40 years. Even stocks - after a decade of futility - have done better.

As the article notes:

But the {gold} price surge has had others shaking their heads. As an investment that does not produce income, its attraction lies solely in the hope that its value will rise or at least be maintained. As a metal, its main use is in jewellery. It defies logic, say the bears, that its price should remain so high without any fundamental change in the sources of demand or constraints on supply. Willem Buiter, a former professor at the London School of Economics who is now the chief economist of Citigroup, has called gold the subject of “the longest-lasting bubble in human history”. He says that he would not invest more than a sliver of his wealth “into something without intrinsic value, something whose positive value is based on nothing more than a set of self-confirming beliefs.”


Gold: Store of value | The Economist