The Wall Street Journal’s Jason Zweig famously referred to gold as a “Pet Rock” in 2015. He was blasted by people who understand that gold is no passing fad, and it serves some very important roles in an investment portfolio.
The valuable roles which gold play have been well covered here. It’s a hedge against both inflation and deflation, it represents true diversification for portfolios stuffed with conventional securities, and it is a way of protecting wealth during tumultuous times.
But Jason Zweig, Warren Buffett and other notable gold critics who complain about the metal “just sitting there” fail to understand the flaw in their basic assertion.
What they believe to be a potent argument against gold is, itself, one of its great attributes. An asset which can “just sit there” forever, largely impervious to outside political and economic forces, is extraordinary.
Warren Buffet and Jason Zweig are big proponents of stocks. However, they will have a lot of trouble choosing a company today that will still have value 100 years from now.
Most of the top publicly traded companies from a century ago are gone and forgotten.
In order to grow an equity portfolio, investors have to take on significant risk. They must actively manage which shares are held or buy an index fund. While an index seems like the safer bet, there is no certainty that that an index purchased today will still be functioning well into the next century.
Over that time scale it isn’t even clear whether the current financial system, laws, and property rights will persist uninterrupted. Meanwhile, a privately held gold coin can sit there hidden away, independent of all these risks.
Not Real Estate…
Land is tangible and its supply is limited, two important characteristics which it shares with gold. However, it is not private, portable, or liquid. Taxing authorities can, and probably will, continue taking full advantage of the fact that property owners can neither hide nor escape their purview.
Landowners who intend to hold for the next hundred years must also accept geopolitical risk. There is no telling when, or if, the nation might succumb to the forces of socialism and property rights disappear.
Investment real estate might be a winner during normal times, but, over the next ten decades, that is by no means a given.
Cryptocurrency offers some promise, and there are many reasons to hope it succeeds. There is nothing the world needs more than honest money, and crypto has that potential.
However, Bitcoin and other tokens should be viewed as technology start-ups. The amount of risk in picking a “coin” and holding it over the long haul is exceptionally high.
There are major hurdles for the technology to leap in terms of scaling. And there are lots of tokens competing for adoption. Some may well succeed, many, if not most, are likely to fail in just the next few years.
Picking long-term winners and losers will be very hard to do, particularly given the entire technology landscape continues to evolve.
Many proponents insist that Bitcoin is already a great store of value. That is a gross mischaracterization. There is far too much risk for that to be true. It may never be true.
Not Dollars, Not Bonds…
Gold, which “just sits there” retaining value over time, looks even more compelling if the alternative is holding cash which is guaranteed to depreciate. It looks downright irresistible compared to something like government bonds redeemable in the fiat currency of some insolvent government.
Nations such as Austria, Argentina, and Mexico have begun issuing “ultra-long” 100-year bonds. Officials at the U.S. Treasury Department are thinking about it. We doubt investors buying these instruments have any intention of sitting on them for the next hundred years.
They would have to be crazy. The only asset worth wagering on over that time scale is gold.
This week’s Market Update was authored by Money Metals Director Clint Siegner.