This is not to say gold is not affected by Macro issues. But that is very different than saying Gld has a fundamental value, an intrinsic worth. It does not. [. . .] Gold is not, and can never be, an investment. It has no true intrinsic value, no cash flow, no earnings, no coupon[,] no yield. What people call fundamentals are nothing more than broad macro analysis (and how have your macro funds done lately?). Gold is the ultimate greater fool trade, with many of its owners part of a collective belief theory rife with cognitive errors and bias. [bold emphasis in the original]Ritholz is absolutely right: Gold does not have cash flow, earnings, coupons, or yields. Unlike, say, a factory, or a piece of land, gold cannot produce anything; gold just sits there, inert. Though it has a handful of industrial applications, and of course can be used for decoration, gold has no practical use. You can’t eat gold. You get caught in the middle of the Sahara with a ton of gold and not a drop of water? You’ll be the richest corpse in no time.
So just like Ritholz says, gold is not an investment—unless.
Unless what? Unless the fiat currency itself becomes worthless.
It is this possibility—that the novel, experimental and reckless measures being taken by the central banks of the major reserve currencies might well end up debasing the dollar, the euro and the yen to the point where they are as worthless as Weimar-era Deutsche marks—that makes mincemeat out of Ritholz’s perfectly sensible analysis.
The central banks’ screwing with the fundamentals of fiat currency is why gold is a good investment. At this time, in this era of “heroic central bank measures”, gold is probably an essential investment, considering the general direction the global economy is headed in.
Let me be clear: I do not believe that fiat currency is necessarily a bad thing. To my way of thinking, fiat currency is just a tool—and a very useful tool at that, no different from, say, a hydraulic press, or a hunting rifle, or an automobile: Potentially very dangerous if handled irresponsibly, sure—but extraordinarily useful when properly managed and handled with respect for the potential for damage that it can cause.
As I see it, the regime of stable fiat currencies is likely one of the reasons that the world’s economies in the last 100 years have been able to deliver the material prosperity which has raised the standard of living of most of the world’s people, even as that global population has expanded geometrically.
The thing that makes fiat currency so useful is precisely its ability to generate moderate inflation. An inflation rate of 2% to 5% in “advanced” economies, 5% to 8% in fast-growing “developing” economies, is the very fuel of growth and expansion. That inflation of a fiat currency is the motivating factor behind the growth of productivity and efficiency. To my way of thinking, modest fiat currency inflation is the treadmill goading the economy forward.
Consider the material progress that has existed over the last 100 years. Now compare that material progress to that during the preceding 100 years. Or to the preceding 1,000 years, for that matter. Sure, “correlation is not causation” and all that—but are you honestly telling me that there is no causal relationship between a relatively stable currency regime over several decades, and an upswing in productivity during the same period? If that’s not the case, then please, explain why the Middle Ages were economically stagnant?
Now, if we were living in an economic period where the fiat currency is not being messed with, I wouldn’t even bother discussing gold as an investment. I would be in full agreement with Ritholz’s analysis, and move on to thinking and writing about other things.
But Barry (with whom I’ve exchanged emails, and who seems to be a great guy and a smart man), while paying close attention to investment fundamentals, is ignoring monetary fundamentals. Specifically, he is taking a cavalier attitude towards the machinations of the three reserve currencies’ central banks over the last four years.
It’s not that gold is such a great investment—it’s not. It’s that the central banks of Europe, Japan and the United States are screwing with their respective reserve currencies something awful—so much so that it is inevitable that it will all end in tears.
Therefore, as an investment to protect against a catastrophic currency collapse, gold would be far and away the smartest bet.
If we were having this conversation during, say, the Recession of 1958, I’d be with Barry: “Ignore gold”.
But this is not an ordinary recession: This is a balance-sheet depression which is being exacerbated by Federal government debt monetization (otherwise known as Quantitative Easing).
Look, before 2008, the only times I’d ever thought about gold was when I was buying something for my wife or one of my girlfriends—
—but that was before Quantitative Easing I. That was before Quantitative Easing II—that was before Operation Twist—before QE-III, and before QE-∞.
Now? Gold is the absolute best and only bet against currency collapse—which is coming, courtesy of central bank irresponsibility.
The central banks have collectively decided that they have to “fix” the economy, rather than letting the chips fall where they may and allowing capitalism’s creative destruction to do its thing. The Federal Reserve, the European Central Bank and the Bank of Japan are all trying to, a., protect the banking sector at whatever the cost, b., finance (by way of debt monetization) the fiscal deficits, and c., have the economy grow back to where it was before 2008.
In other words, they are reneging on their obligation to protect the fiat currency, and instead are engaging in “heroic measures” for political purposes.
That is why gold is a good investment. It’s the only thing that will remain valuable, once the central banksters “experiments” blow up in their face.
If you’re interested, you can find a much more thorough analysis of possible hyperinflation of the dollar at my site The Strategic Planning Group. At the site, I gameplay possible strategies to protect yourself, if and when the dollar crashes.