Going For Gold

There is more nonsense written about gold than any other asset class, says Simon Smith

I SAY THAT with real conviction because I’ve read a lot of it and experienced it first-hand.

Like the time, for example, I was on TV during a time of crisis, and another guest told me to stick everything in gold! I question their logic and there is generally none, apart from something about governments devaluing fiat money and gold being the only safe asset in town.

I remember being at a talk in 2013 where a very experienced investment bank analyst was explaining about how he had put nearly all his pension into gold and silver.

As a result, he’s had to add several more years to his working life, with gold falling nearly 25% in the following 2.5 years and missing out on equity and bond returns to boot. But how can it be that, to me at least, people lose all sense of reality and logic when talking about gold?

You can throw any argument at them, but nothing will change their mind

The first reason is that gold has no yield. Property has rent, shares have dividends, bonds have coupon (interest) payments and cash yields interest, albeit not a lot at the moment. Gold yields nothing.

Indeed, there is generally a cost to holding gold, given that you have to store it somewhere, whether directly or indirectly (i.e. if you invest in a fund that stores on behalf of investors). It’s the yield on assets that plays a large part in determining their value so, without it, value is determined purely by capital appreciation (minus storage costs).

The second reason derives from gold’s historic use for backing the value of money. Long story short, long ago gold was used as money. Gold was exchanged for something of perceived equal value. All well and good, but carrying gold around naturally turned out to be rather cumbersome. Hence the switch to paper money, which used to say something along the lines of ‘this entitles you to such and such amount of gold which I have held at some designated place’.

Eventually, there was not enough gold, but we did have gold standard to back currencies, so each currency was pegged to be worth a certain amount of gold. That, in turn, fell to pieces in the early 1970s, so we are left with pieces of paper which everyone believes are worth what they say – so called ‘fiat money’.

There are some who are inherently uncomfortable with this whole concept and that underpins their belief that gold is ultimately more valuable than any form of paper currency. You can throw any argument at them, but nothing will change their mind. It’s a bit like a cult.

Now overlay the above two arguments with the fact that the price of gold rose for twelve consecutive years between 2001 and 2012. The price of gold, in other words, rose before, during and after the global financial crisis. This made gold the most indestructible asset class in their eyes. That’s when the ‘gold bugs’, as they are known for some strange reason, were at their most fervent. And there was no reasoning with them, although I did try.

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