An Alternative to Gold

Gold is a commodity, like oil, lumber and steel. As a commodity, it derives at least part of its value from its useability in the industrial process. However, as gold bugs point out, gold serves an additional function: It is a "store of value" that is non-perishable, easily transportable, rare, hard to find, costly to unearth, universally recognized and of historical importance. No other stores of value (U.S. dollar, foreign currencies, etc.) nor any assets (stocks, bonds, real estate, collectibles, etc.) have all of the special properties that make gold such an ideal store of value . . . as the gold story goes.

Based on this type of reasoning, financial pundits have been recommending buying gold coins and gold mining stocks, in anticipation a continued run-up in price, from $410 per ounce today to as high as $3000 (!) per ounce over the next few years. The argument is that throughout history governments have had a very bad track record of managing their budgets, leaving us all exposed to risk of rapid currency depreciation, as indicated by recently weakening U.S. dollar. In times of crisis, gold should retain value while currencies become worthless. So, buy up all the gold you can, before the crisis strikes, right?

Well, not so fast, please. In my opinion, the gold pundits are overlooking two very important character traits of the human species--survival instinct and innovation. One of the conclusions George Soros reached through his trading experiment documented in Alchemy of Finance is that the financial markets are always "on the brink," just about to be engulfed in a crisis when, at the eleventh hour, something changes to dissipate the economic stress. What is happening here is that the key players in our economy (i.e., government officials and businessmen) make policy revisions to alter the rules of the system so that the impending crises never really occur. Basically, people use their survival instinct and a little innovation to prevent our economic system from collapsing.

In my opinion, gold as a store of value is overrated. Times have changed. The world's leading multinational corporations do business in all of the major currencies. Information flows instantaneously across borders. The world's financial systems are interconnnected to such a degree that an economic crisis in any major economy would quickly spread to encompass the entire world. Trying to run to safety with your stash of gold tucked under your belt when crisis strikes would be a futile move when, in fact, there will be no safe place to run to (or, equivalently, no place will be safer than where you already are!).

With our greater interconnectedness across international boundaries comes a clearer realization among governments, private enterprise and citizens alike, that we should cooperate for the common good of all of us. I personally have high confidence in our ability as a society to steer our world economy ahead, avoiding large-scale calamity along the way. Having "faith" in our system, I am quite happy to own a portfolio of stocks of companies leading the world economy towards a better future. My bet is that these multinational companies will grow faster and generate more profit for me as a shareholder, than would hoarding a pile of gold under my pillow.