Why Own Gold?

The Appeal

There is something within our DNA that attracts us to gold. Whether it is our fascination with the indestructible element, the glare it gives when cast into jewelry, or the feel of such an object in our hands.

It has been used in jewelry with specimens dating from long before the first phonetic alphabet. There have been wars fought for it, pharaohs buried with it, and stories of prospectors risking life and limb to find it.

Its properties have made it the ultimate form of money that has survived wars, natural disasters, along with the rise and fall of empires. It does not corrode, does not erode, and does not tarnish. Gold from a shipwreck a thousand years ago would look exactly as it did prior to its oceanic plunge, if found today.

Money Is Not What You Think

If you ask most Americans, “What is the color of money?”, they will most certainly say “green”. This misconception has been a magic trick pulled on the public that would make Houdini himself envious of its success in misdirection.

To meet the qualifications of money—by definition, the unit or object must possess certain characteristics:

• Unit of account
• Medium of exchange
• Portable
• Durable
• Divisible into various denominations
• Fungible (each unit can be interchanged with another of the same kind)
• A store of value

While most of the above properties could be argued in favor of the dollar, the most important function of money is as a store of value. The U.S. dollar—like all fiat currencies—fails the store of value test abysmally. The dollar has lost approximately 97% of its purchasing power since its creation.

People exchange their time and energy to earn money. Having the ability to save for future purposes is not only a major benefit for the laborer, it is the bedrock for investment into the productive capacity of a nation. A currency that is devalued over time gives people little incentive to hold on to it, as they will get more goods and services for it now than they will in the future. The lack of savings by the masses prevents future investment into industry and technology, hindering the prosperity of the nation itself.

Gold Is Money

Throughout history, many attempts have been made to establish a basis for commerce and stability thereof. There were barter systems. People traded with shells, gems, livestock, blankets, etc. There have been attempts to force government-issued currencies onto the people. Yet, it was recognized thousands of years ago that gold (and silver) meet all the requirements of money and were the most successful mediums of exchange to date. An executive order by a president who was facing impeachment does not change how commerce actually functions or what truly has value. The de-linking of the dollar to the underlying metal backing is a social experiment that, with history as a guide, will surely end up tragically for the average American.

An ounce of gold from ancient Egypt or Mesopotamia is still an ounce of gold today. It has not changed. It can be exchanged anywhere in the world, without exception, for the local currency in that country. It has held its value through millennia and will continue to do so in the future. If one of your ancestors passed a gold coin through the generations, it would still be the same gold content. It may have a face value of $20 on the coin, but the gold itself that it contains would now be worth thousands of dollars due to the devaluation the dollar itself has suffered. If your ancestor left you a $20 bill from the same time, it wouldn’t buy you an extra value meal today.

Paper Currencies Are Worthless

Paper currencies have historically failed 100% of the time. There is not one example, of the thousands of paper currencies issued, that has survived the test of time; not one. In 1791, Voltaire famously stated that “All paper currencies return to their intrinsic value—Zero.” He has not yet been proven wrong and likely will never be.

Paper currencies are contrived and managed by governments themselves or their respective central banks. The issuing authority in time, as sure as the law of gravity, will expand the currency supply and devalue the currency in an attempt to secure more power for themselves. There comes a tipping point where the people realize their currency is losing value and will rush to spend it. As the rush to spend continues, the amount of goods and services in the economy do not increase with the velocity of money. Prices rise rapidly in an effort to absorb the currency. The government will then issue more and more currency to try to offset the inflationary pressure—until the people no longer trust that there is any value left in the currency, thereby refusing to accept it.

Store of Value vs. Investment

The distinction between store of value vs. investment is important to understand. You may see advertisements claiming that you should invest in gold. Gold isn’t what the author would consider to be an investment per se. The commercials will tell you how much gold has gone up in the past handful of years. The statement that gold has gone up at all is a misconception. The truth is, gold hasn’t gone up; the dollar has fallen. Gold does not pay quarterly dividends and it does not produce anything or pay a yield. It simply exists as a finite resource that just happens to be an excellent guard against fiat currency devaluation.

The primary purpose of owning investment-grade gold is to protect the purchasing power of your money that was earned. While it is a near certainty that gold will be priced higher and higher in the future, that price is very relative. Gold is simply a gauge to measure the fall of the buying power of the currency it is priced in.

If one ounce of gold centuries ago were to purchase a custom-tailored suit, that same ounce of gold today would buy a nicely hand-tailored suit of the finest fabric. Similarly, if fifty ounces bought a median-sized home, it would do the same today. The point is, gold would not have increased in value—it simply changed in price—separating it from the traditional purpose of investing.

Stocks, Bonds, or Gold

Traditional portfolio recommendations often include a mix of stocks and bonds, whereby your exposure to bonds increases as you age, reducing your supposed risk. These recommendations generally exclude gold altogether in their formulas for various reasons; none of which are for your benefit.

The fact that gold is not a traditional investment vehicle does not mean that it should be excluded from one’s portfolio. Physical precious metals are the only asset class that carries no counterparty risk. In both stocks and bonds, you are putting your faith in either a corporation or government entity. Stocks depend on proper management, growth targets, accuracy in financial statements, etc. With bonds, you are getting a fixed rate of interest with the risk that the government or corporation has managed itself properly and is able to pay you at a later date. Real estate, on the other hand, is subject to tax increases, insurance, and other expenses outside of your control. Stop paying your taxes and see who really owns your home.

U.S. stocks are currently very, very frothy. Price-to-earnings ratios don’t justify the elevated prices by any sound metrics. The Buffett indicator, which looks at the ratio of stock indices (such as the Wilshire 5000) divided by the quarterly or annual GDP, is screaming at the moment. According to this reliable pricing mechanism, 75% to 90% is undervalued. 100% or higher is overvalued. When the ratio approaches 200%, Buffett says investors are “playing with fire”. Recent readings have far surpassed the dot-com bubble and are nearing 230%.

Bonds, likewise, were in a secular bull market for over 40 years. They hit a theoretical peak during the era of 0% interest rates. With recent rate hikes and more likely to follow, coupled with an out-of-control deficit, bonds are likely to descend much further and prove to be a poor choice.

With both stocks and bonds, it is likely that a traditional investment portfolio will gain in dollar terms, yet lose value at the same time. Although such a statement may sound counter-intuitive, inflation acts as a hidden tax that consistently erodes the value of the dollars they are priced in. Having an allocation of physical gold protects against this erosion, as the price of gold acts as a countermeasure to the inflation.

The Government Guarantee

When currency is devalued, it takes time for it to work its way through the economy and impact price levels. There is often a lag of 18 or more months from the time of stimulus injection. Therefore, those closest to the point of creation benefit the most from its purchasing power. In other words, the government is able to spend it before it has had an impact on prices.

With the national debt exceeding 40 trillion dollars, coupled with three trillion dollars in deficit spending annually, the remaining value of U.S. dollars will diminish continuously. Although the dollar is no longer backed by gold, you can be guaranteed the government will continue its habit of reckless spending. Owning it is possibly the best protection you have against this malfeasance.

History is rife with examples of governments destroying their currencies. In each case, individuals holding gold were sheltered from the turmoil. If the allure of the metal alone doesn’t attract you, you may consider its ownership as an insurance policy with a perfect track record.