The reasons I don’t buy gold (Video!)

by Pop on November 19, 2010

This could probably apply to a lot of markets.

I’ve written too many times about all the reasons I’m not a fan of gold as an investment, even if it’s only a part of a diversified portfolio. I know, I know— “It’s a currency of last resort.” Or maybe, “It’s always been a store of wealth in times of inflation.” But something doesn’t strike me right about an “investment” whose only purpose is to wait for the next buyer to come around.

I’ve written that a bunch of times. So with this video send-off, I promise not to write about gold until next year. This was created using a text-to-speech moviemaker called Xtranormal. I’d be generous if I called it b-movie quality.

Obvious hat-tip to Warren Buffett, and the numbers in here were based on an estimate of how much gold exists in the world that I found on a rather random website. So take it with a grain of salt.


{ 9 comments… read them below or add one }

Investor Junkie November 19, 2010 at 9:14 am

Riddle me this.. Why do central banks own gold? No currency is based upon gold, so why do they continue to own it?

Pop November 19, 2010 at 7:16 pm

@Investor Junkie: Because investors think it holds value, right? Don’t get me wrong. I think it’s possible and even probable that our irrational fixation with gold will last long after our deaths, but that doesn’t change the fact that gold is only worth as much as the next person will pay for it.

Investor Junkie November 19, 2010 at 8:11 pm

@Pop: “gold is only worth as much as the next person will pay for it.” Can’t you really say that about any asset? How much is a bond worth, how much is a stock worth? How much is real estate worth? Even more abstract how much is someone’s service worth? Whatever the demand for it is. Whatever someone else is willing to pay for it.

Yes they all have some inherit value, but they can be sold/bought under value. Before things like P/E was developed valuating a stock was a black art.
There are some metrics to valuate gold commodity but nothing set in stone so to speak.

Also in my first post “they” meant central banks. Why do they still own it, not investors.

Pop November 19, 2010 at 8:40 pm

That’s what I’m saying. Central banks own it because the people see it as a store of value. If investors didn’t see it as a store of value, central banks wouldn’t own it.

There’s a fundamental difference between stocks, bonds, and land as assets and gold. If no one wants to buy your stocks, bonds, or land (or commodities for that matter), you can use it for something.

Your company will make and sell stuff and generate earnings, which once the company matures will be dividends for you. Your bond will pay you every six months and then mature, giving you a certain amount of money back. You can build something on your land or live there. Sure, we all hope that if we need to liquidate those assets, someone will be around to pay a fair price for it, but what gives them “intrinsic” value is the fact that you don’t need another sucker to buy them from you in order to make money on them.

If you have a pile of gold, you can’t do anything with it until you have someone to sell it to. It’s more like a collectible than an investment. I guess you could turn it into jewelry, and there are limited industrial uses, but I don’t think that’s what investors are using to value it now.

Rob Bennett November 21, 2010 at 5:17 pm

My view is that your point re gold is well taken, Pop. But I see it as a different version of the point that I often make re overvalued stocks. When stocks are selling at three times fair value, only one of three of the dollars you direct to buying stocks is buying stocks — the other two dollars are buying cotton-candy nothingness that gets blown away in the wind with time. Overvalued stocks retain their value only for so long as other investors are willing to continue pretending they retain that value.

Gold is not the answer, in my view. My view is that the answer is to buy stocks when they are selling at a reasonable price and to buy the assets most likely to retain their value (cash-like assets) at times when stocks are insanely overpriced for the purpose of moving that money into stocks when stocks are again available at reasonable prices.

I like the video.


MossySF November 22, 2010 at 10:22 am

NPR Planet Money had a nice story on why gold seemed to have been the element of choice.

If the universe is telling us to use gold, why fight it? :)

BILL February 17, 2011 at 6:30 pm

1. You cannot eat, drink, play, record, drive, or otherwise use gold in a practical way.
2. Money invested in gold is money diverted from the market, where it’s hneeded to produce real goods and services people need.
3. Am I correct in assuming most investors in gold buy and keep for the rainiest day possible whey and and almost everybody else is dead broke? Gold will then be sold, not at current (bubble?) prices but at prices the market will bear. Who will buy the gold. The company you bought it from? But, then, whom will they re-sell that gold to? Or will the company just pile up gold brick after gold brick pending a return to prosperity? And when you sell this gold at this horrible time, assuming you can find a buyer, you will receive a tremendously inflated currency (remember the pics of a wheelbarrow full of momney to buy a loaf of bread in post-WW I Germamy). In the meantime, gold investors will hold their gold. Who is selling at these high prices? Probably very few people, because they are holding gold as a “hedge” for that inevtiable “day of reckoning.” So, gold’s increase in value during this period might make holders feel good, secure, buty they can’t take any increased value to the bank until they sell. Now if somone bought gold 10 or 20 years ago and were willing to sell it now, he could gain a lot of value. But gold pays no dividends and provides no stock splits. And it does nothing for the economny that I can detect.
4. If the market crashes and there is another Great Depression, even if someone tries to sell his gold, so will all the other holders. Not only will the gold be bought, if at all, with worthless money, but only the richest, most secure people (if there are ny left) will be able to buy the gold. Even if they buy it, they will wait until the price goes way down under pre-bubble prices.
5. You can’t buy groceries or gas or pay a morgage with gold. You will need case, no matter how inflated it is. At some point you have to cash it in.
Those who have owned gold for 1en or twenty years could sell now (when there is not a scramble) and maybe make a killing. But if they hold gold till the time when they really need its value, they’ll have to unload i9t for a lot less than they hoped to get, if they can sell it at all. If there’s a Great Depression, gold sellers and buyers may well go bankrupt, along with a great many other business interests and investors.

The lust for gold is based upon a belief in inevitable disaster. The desire to purchase stocks and mutual funds is based upon the belief that good times can last. That’s the philosophical part of it. I notice that there’s a scarcity of arguments against gold, but they are usually pretty well reasoned. On the other hand, people are listening to a lot of assertions about the value of gold as a hedge with no evidence of what happened to those owning gold, say,before the Great Depression. There should be a wealth of success stories available to help sell gold if it’s really all it’s cracked up to be. But don’t even hear a little anecdotal evidence. As someone once said, in a commercial, “Show me the meat.” Show me some real-life cases where gold holders saved themselves from disaster. But also show me the gold holders who couldn’t sell their gold or had to sell it for peanuts.

cj March 22, 2011 at 12:52 am

Well it’s been a few months, and how wrong you’ve been. I look forward to you rescinding your comments, as us on the other side of the gold coin have laughed all the way to the bank….

Nathaniel Brennan July 18, 2011 at 11:57 pm

This is laughable. Especially now that the TARGET PRICE FOR GOLD IS $10,000.00

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