What does gold, the atomic bomb, and babies have in common? Well, Marshall McLuhan said that the atomic bomb was a universal truth; everyone understood it and feared it. Babies, in Marshall’s rubric, are also understood across the planet earth.
Now, what about Gold? I would venture to say that almost everybody on earth with the exception of some indigenous tribes in the Amazon rain forest or in the South Pacific appreciate the value proposition that Gold represents.
What is that value proposition? I think everybody would love to own gold although certainly not everyone would select gold for their investment portfolio. And that is where many people are making an important mistake.
I don’t know of another asset that throughout history has maintained its purchasing power and has been universally recognized as a store of value. While Warren Buffett doesn’t like gold because it pays no dividends and just “sits there,” to me, it is that very stability, relative to other assets, in this very volatile world, which has promise.
Sure, it sits there. But it maintains its relative value in a world where paper money can lose all its value and cyclicality causes the performance of all asset classes to be an educated judgment.
Well, investing does require an educated judgement for all asset classes with the exception of gold which has a very valuable attribute that I call CERTAINTY.
Anything that is certain, and here we are talking about the certainty around maintaining relative value, should have some optionality in its price. That certainty should be worth something.
I contend that Gold has no value in its current price for this feature, nor any value for its universal “brand” recognition.
Since everybody understands gold and recognizes it, does everybody own gold? Do those who own gold own enough? It seems to me that in fact very few people or institutions have any investment in this asset class.
That, to me, is a big mistake. I think Gold is trading today without any recognition of the role it has played throughout history and the increasing recognition of gold as the most stable form of money.
By the way, Warren Buffett did once buy silver when it was in the $3 dollar range, because he thought it was cheap. Perhaps Warren develops a point of view on gold. :-) There is, after all, only $180 billion worth of new annual supply, which isn’t much when you think of the money in the world.
Yes it’s true. All the gold ever mined is worth far more, estimated to be 7 trillion, but as I have previously noted that 7 trillion fits into two Olympic swimming pools and there are no significant sellers in the market today.
In the past, there have been periods when central banks have reduced their gold positions; of course today it is just the opposite and the Chinese, the Russians, the Indians and many central bankers are buyers and would buy far more if the supply was available.
What is one way that supply becomes available? A dramatically higher price!
In other words, we are NOWHERE NEAR THE EQUILIBRIUM GOLD PRICE.