Fool's Gold

I've written on this issue before, and last week, our investing hero Warren Buffett also weighed in, in an op-ed piece for Fortune magazine. I strongly recommend everyone read Warren's excellent article. Ofcourse, when Warren speaks, people listen (and criticize, like this post from a commentator for the WSJ).

Essentially, what Warren is saying is exactly my thesis on the yellow metal - it has no productive value! Yes, one could argue that as governments continue to print money to satisfy their mountains of unfunded liabilities and deficits, gold may be relatively more attractive than paper currencies like the US dollar. Afterall, governments cannot print gold. No, they cannot print gold; but they sure as hell can confiscate gold (Google 'Executive Order 6102'). As a sidebar, if you are really afraid of government failures and the end of paper currencies, you should buy guns and canned food, not gold (although that seems to be what some goldbugs have been advising too!). You cannot eat a gold bar (or more precisely, your body cannot digest gold), and most certainly, you cannot eat a claim on a bar of gold stored in a vault.

But since this is an investing blog, let's focus on the investment aspect of gold. Investing is the forgoing of current consumption in exchange for a claim on future consumption that is hopefully higher than current consumption. When you invest in gold, all you are betting on is that there are more people behind you who would want to own gold more than you and would be willing to exchange more goods and services (or paper money!) for your bar of gold than what you've paid. The classic Greater Fool Theory of investing. Sure, if you time your purchases correctly, or play up to people's fears, you can make a lot of money (again, we come back to the paper currency; am I the only one to see the oxymoronic contradiction?). But that's it.

Every ounce of the yellow stuff that's dug out of the ground (at huge expenses, one might add), is added to global supply. Gold, unlike oil, a true finite resource, never gets used up. An ounce of gold dug up and refined in 1000 BC can be resmelted into a gold coin in 2012 (incidentally, has anyone looked at recycling the tons of electronic waste we produce each year? All those dead or unfashionable phones and gadgets could be a treasure trove of gold and other minerals!). For now, demand for gold is high because of rampant fears of inflation and government defaults. But when the tide turns, don't be surprised if the price of the yellow metal falls dramatically (we note the marginal cost of producing an ounce of gold is ~$600) as investors (speculators) rush to the exits.

- The Aspiring Analyst