Here at Commonwealth, I’m considered the resident gold bug. In investing, that’s someone who looks to gold as a safe investment and a guarantee against systemic failures, someone who is typically bullish about the price.
I don’t actually fit that description, as I’m neither bullish on gold at the moment, nor do I think gold is a safe investment, nor am I a disaster buff looking to use gold as a hedge. I am, however, one of relatively few people in the firm who are even willing to consider using gold in a portfolio in a significant way.
Is Gold’s Bad Rap Justified?
Commonwealth is pretty typical in this. Gold isn’t generally considered a “respectable” investment, in that it is impossible to value and its worth depends on what others will pay rather than on some intrinsic value. John Maynard Keynes, for example, referred to gold currency as a “barbarous relic.” Warren Buffett famously compared the value of a cube of all the world’s gold to seven ExxonMobils and all of the farmland in the U.S., opining that he would take the companies and the land.
In short, investing in gold isn't generally considered a smart move.
Looking at the chart over the past five years, with gold at multiyear lows and dropping, it’s hard to argue with that conclusion.
And yet, you could say the same things about every asset class at one point or another. Four years ago, gold was at an all-time high. Is it that much of a surprise that the bubble has deflated? Eight years ago, in 2007, stocks were also at all-time highs, and that bubble also deflated. Seven years before that, in 2000, the exact same thing happened. They have since recovered, and the same might happen with gold.
It’s All About Price
The bottom line is that, in investing, price is very important. Whether something is a good buy depends largely on price. Stocks, at the wrong price, can be a bad investment. So can bonds. So can gold, as we see in the chart.
When prices gets crazy, explanations pop up for why they are actually reasonable. “It’s different this time!” are the four most dangerous words in investing. For gold, the price four years ago was justified by the pending collapse of the currency system, which did not happen. For stocks in 2000, it was the new economy, which did not happen. In 2008, it was the strong housing industry, which tanked, and now it’s low interest rates, which at some point will go up.