Wednesday, February 09, 2005

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.


Anonymous Anonymous said...

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2:42 PM, October 24, 2005  
Anonymous Anonymous said...

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8:46 PM, October 26, 2005  
Blogger Gordon said...

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9:05 AM, October 27, 2005  
Blogger MmmmYah said...

Funny how many things change after 4 years... stocks are in shambles and gold rules...

11:26 PM, April 06, 2009  
Blogger dermopj said...

Gold will rule always has for over 4000 thousand years

11:43 AM, August 24, 2009  
Anonymous Anonymous said...

The problem is your stocks are valued in US Dollars. If the US government continues to print money and trash the dollar, you can't prevent a crisis by changing the rules of the game at the last second. Just because it's been 80 years since the great depression doesn't mean fiscal and monetary foolishness will go unpunished. A better solution would be to put our currency back on the gold standard.

9:02 AM, October 21, 2009  
Anonymous Gold Coins said...

Every one want to save there wealth physically gold bullion is good choice.Thanks for the great reading, we buy gold coins in a recession. I will pass this on to our Ira clients to read.

Gold Coins

1:37 PM, January 21, 2010  
Blogger amaurosis.fugax said...


returns on gold: 300%
returns on stock: 0% or -100% if the "multi-national" you mentioned didn't go bankrupt

Lessons learnt:
Never take advice and do your own thinking and get the fundamentals right.

New Rule Learnt:
Its more important to know how not to lose money than to make money

2:57 AM, June 09, 2010  
Anonymous Anonymous said...

Well Lloyd I won't be listening to you anymore. Not only were you really really wrong, but your argument is totally one dimensional. By the way, the dollar is now well on it's way to crashing. When your dollars are worthless you'll wish you'd had some gold to preserve value.

7:48 PM, July 06, 2010  
Blogger Randy Semrau said...

It's 12 Aug 2011, and gold has now traded above US$1800.

Good call, Lloyd.

11:09 AM, August 12, 2011  
Anonymous Anonymous said...

It's August 12, 2011...the Euro is at US$1.42 and gold has now traded above US$1800.

So much for your theories, Lloyd.

11:11 AM, August 12, 2011  
Anonymous Penny stock newsletter said...

I believe that silver is a great alternative to gold. The possible chance that government will make owning gold ilegal exsists so owning other metals is always a good idea.

10:02 AM, October 25, 2011  

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