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Dear Reader, |
"Gold isn't special." |
Here you have the studied conclusion of a certain Adam Grossman. |
Mr. Grossman directs a wealth management firm, Mayport by title. |
And he does not believe gold represents a compelling investment rationale. |
Why not? |
"Gold lacks intrinsic value," he informs us, adding that: |
Unlike traditional investments such as stocks, bonds and real estate, which produce dividends, interest and rent, respectively, gold generates no income. As a result, there is no tangible basis for determining an appropriate price — or even an appropriate price range — for gold. |
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Yet does any item or good embody "intrinsic" value? |
Value is a subjective phenomenon — not an objective phenomenon. Value can only be determined in the minds of men. |
It's All Relative |
Does water embody intrinsic value? The man who is drowning will likely offer you a different answer than the human prune succumbing to thirst in the Sahara Desert. |
Is oil intrinsically valuable? What would a caveman do with it? |
Shoes are intrinsically valuable implements, are they not? |
Not to the man who has had both legs shot off they are not. |
It is true, gold hands you no dividend. Yet a dollar bill hands you no dividend — not in itself, as itself. |
Yet as Freedom Financial News contributor Jim Rickards argues, "Gold is money, and money is not supposed to have a yield." |
Meantime, the value of a stock or bond may vary from zero to many thousands of dollars. |
Where then is its "intrinsic" value? |
As always, context is the central consideration. So too with gold. |
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Buffett Hates Gold |
Here this Grossman fellow cites Omaha's recently retired sage, Mr. Warren Buffett: |
Warren Buffett explained it best, when he posed this thought experiment: Suppose, he said, that you owned all the gold in the world and fashioned it into one giant cube. What would it do for you? Buffett joked that you could, "climb up on top of it…polish it…stare at it." But that's it. Because unlike productive assets, gold doesn't produce anything. |
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That's a problem because it makes the price of gold volatile and unpredictable. "All you are doing when you buy [gold] is that you're hoping that somebody else a year from now, or five years from now, will pay you more to own something that, again, can't do anything," Buffett added. |
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Just so. Yet is not the hope that "somebody else a year from now, or five years from now, will pay you more to own something" the animating ambition behind every investment? |
Does a man purchase Nvidia stock today in the hope that he will one day offload it at a loss? |
The answer is no. |
At today's valuations he will likely offload it for a loss one day. Yet let it go for now. |
A Giant Gold Cube Is Far From Useless |
Meantime, the giant gold cube Mr. Buffett belittles as useless is only useless from the superficial perspective. |
It can be melted into multiple discrete units, measured typically in ounces. Each ounce can be exchanged for goods on the free and open market. |
Not useless! |
Besides, let us assume some modern Midas erects his gigantic gold cube. |
He proceeds to "climb up on top of it…polish it…stare at it," as Mr. Buffett suggests. |
Of what value is it? |
Value Is in the Eye of the Beholder |
Recall, all economic value is subjective. And this fellow values his shining gold hulk more than he values the many goods and services he could otherwise use it to obtain. |
Thus he is Mr. Buffett's twin… in some strange sense |
The latter, despite his billions and billions, maintains his being in the same Omaha residence he purchased in 1958 for $31,500. |
He values that carefully constructed perception of frugality more than he values the high opulence in which he could wallow. |
And so he sits atop his modest abode the way our Midas sits atop his gold cube — seeming opposites — yet fundamentally brothers. |
One derives value through vanity. The other derives value through seeming anti-vanity. |
Yet look closer. Each is a species of vanity. |
Each precisely reflects value. |
Is Gold Really an Inflation Hedge? |
Yet I veer off track. Let us return then to this Grossman character, and his case against gold: |
Another key problem with gold: It's perceived as a way to hedge against inflation, but that's more of a perception than a reality. Gold's reputation as an inflation hedge stems mainly from its performance during the 1970s, when inflation in the U.S. ran as high as 14%. During that decade, gold rose dramatically, from $35 an ounce in 1970 to $750 in 1980. That led many investors to conclude that gold and inflation must be linked. |
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But in subsequent years, gold languished. Throughout the 1980s and 1990s, gold mostly traded between $300 and $400. It wasn't until 2007 that gold finally got back above its 1980 peak. |
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Gold has also disappointed investors in more recent years. In 2022, when inflation rose as high as 9%, gold didn't do terribly well. It did rise early in the year, but when inflation later eased, gold fell. |
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By the end of 2022, gold prices had fallen all the way back to where they'd started. In a year which saw the worst inflation in a generation, gold delivered essentially no net gains. |
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Why I Like Gold |
There is justice here. And gold, despite its loudest drummers, is not a perfect inflation foil. At times, it may often prove a poor inflation foil. |
Yet there is a reason why many of the world's primary central banks have been piling up gold in recent years. |
I hazard the answer relates very little to "tradition." |
I hazard instead that the answer relates strongly to the expanding vulnerabilities of fiat currencies. |
It appears the fiat system is beginning to wobble. And the central banks themselves know it. |
Why am I for gold, personally? |
I am for gold precisely because gold is honest. Gold just "sits there"... as silent as the Sphinx… as silent as the tomb. |
It asks for nothing, it promises nothing. |
Gold is available for purchase. Yet it is not for sale. |
And anything honest in this world is worth a defense. |
So little honesty… evidently… remains. |
Brian Maher |
for Freedom Financial News |
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