Thursday, January 13, 2011

Be Careful What You Wish For: Is Buying Gold A Bet Against Your Own Currency?


I first saw this quote from Charlie Munger (Warren Buffett's investing partner at Berkshire Hathaway) last weekend in the Financial Times. It was reprinted on The Big Picture blog, authored by Barry Ritholtz

“I like working and understanding what works and what doesn’t in human systems,” he said. “To me, that’s not optional. That’s a moral obligation. If you’re capable of understanding the world, you have a moral obligation to become rational. I don’t see how you become rational hoarding gold. Even if it works, you’re a jerk.”

If you're looking for something to do this weekend, the link contains a two hour interview with Mr. Munger.

Munger to Goldbugs: ‘You’re Jerks’ (U Michigan 2010) | The Big Picture

I like this quote from a variety of standpoints.

First, putting a small gold position in your portfolio may make you feel savvy and aware but, in all likelihood, will do little for your overall financial health. If the gold holding is correct, it probably means the rest of your portfolio has been trashed.

Second, buying gold is in effect (as Munger suggests) almost a bet against your own currency. No one will be happy for you if you're correct. Just try to take gold coins to your local supermarket to buy groceries.

Finally, buying gold is probably not based on any sort of fundamental analysis. Gold is almost exclusively used in jewelry, as it is soft and has no other industrial uses. Tracking gold supplies, and who actually holds the gold, is almost impossible. In my opinion, if you want to make a play in commodities, using industrial metals like copper seems to make more sense.