“Gold is money. Everything else is credit.” – John Pierpont Morgan
I must admit, I’m a bit of a gold bug.
After studying economic and financial history for over 16 years, it’s quite clear to me that wealth is not pieces of paper, but economic goods. And money–as a store of value or medium of exchange–is not pieces of paper, either, but an objective equivalent of wealth freely chosen by economic participants.
Over thousands of years of human history, economic actors chose first rocks and cattle, then base metals like copper, and finally precious metals like silver and gold as mediums of exchange.
Governments, starting with Croesus in Greece, started minting coins of precious metal not because they arbitrarily decided what money should be, but because market participants were already using it and they grabbed the market for themselves (not for the first or last time, I might add).
After seizing that market, every government has proceeded to debase money by reducing the amount of precious metal in coins, and every time economic participants have adjusted their actions accordingly, revealing the debasement for what it really is–inflation.
Every time, inflation got out of hand and led to price controls that, as always, caused shortages instead of reducing inflation. And each and every time, this led to a slowing and contraction in economic growth that eventually led people to demand money backed by specie–metal or metal-backed currency.
Both the Chinese and French boldly tried paper currency only to find it yielded the same disastrous result as metal coin debasement–but faster. Since the 1930’s, U.S. currency has not been redeemable in specie. Since the early 1970’s, U.S. currency has not been backed by specie at all. Want to guess why the 1970’s witnessed a huge spike in inflation?
Look at a dollar bill some time and you’ll see written across the top “Federal Reserve Note.” A note, for those of you who don’t live on planet economica perpetua (I do!), is a debt instrument–in other words, credit. As Mr. Morgan put it, gold is money and everything else is credit.
With that overlong introduction, you get an idea of why I believe gold is money. But, let me be clear, that doesn’t necessarily make it a good investment.
I think Warren Buffett put things clearly when asked a question about inflation protected assets at his most recent annual meeting. He noted that there were three types of assets: 1) assets backed by currency, like dollars, euros, bonds, savings accounts, 2) assets backed by something tangible, like gold, art, antique cars, diamonds, land, and 3) producing assets, like stocks, farm land, rental real estate.
In an inflationary scenario, you can expect the first type to lose value (perhaps badly), you can expect the second to maintain value, and you can expect the third to grow in value.
I place gold firmly in the second category, which makes sense. You expect gold to maintain value regardless of inflation, but you don’t expect it to grow in value relative to the value of other things. Gold is money, so it is a store or protector of value, not a grower of value.
You do, however, expect the third category to continue growing regardless of inflation, because it throws off economic value. Instead of being debased, like currency denominated assets, or maintaining value, like tangible assets, you would expect producing assets to continue producing.
A farm continues producing corn, regardless of how corn is priced. Stocks are priced in terms of earnings, where revenues and costs adjust to changing prices over time. Rental real estate rates adjust to underlying currency, whether dollars, dinars, or drachma. You get the idea.
I know gold is money, but that doesn’t make it a great investment. Gold may preserve value, it may provide insurance against negative outcomes, but gold is not a producing asset. You may speculate in gold prices, but that’s not investing. For my money, I want growth, not standing still or speculation.
Gold is money, no doubt, but that doesn’t make it a sound investment.
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.