Gold

By Brad Thomason, CPA

 

So what about gold?  With the price running straight up the side of the building the last few sessions to touch new highs at $1,900 an ounce, this looks like as good a time as any to make a few comments.

I’m not a gold bug.  Just thought I’d go ahead and get that out there.  The good news for you is that my lack of gold-bug-edness probably puts me in a better position to conduct a disinterested discussion.  Which I try to do all the time anyway, but it’s easier when there’s no party-line to toe.

Though I’m not a gold bug myself I actually do know several, including one who honest-to-goodness lives in Switzerland.  They are generally nice people, and I see them several times a year at various conferences and other speaking venues.  Predictably, they work for firms that in some way make money off of people buying and having gold, but you shouldn’t read into that that they aren’t genuine.  They do not believe in gold because their company told them to.  They work for the company because they believe in gold (just like we practice in areas that we believe in, and not the other way around).

But the funny predicament that my pals have is one of never being certain which of the stories to sell – um, I mean, tell.  Should you buy gold because it is a “hard asset” that has been valued by mankind for at least 5 millennia and it’s a great long-term store of value and wealth?  Or should you buy it because it’s been appreciating like crazy in recent years, handily beating the pants off the stock market, and leading to gains that are pretty significant in anybody’s book?  In other words, do they tout the defense or the offense?  It’s all very ironic in a schizophrenic sort of way, and I’m ashamed (but only a little) to admit that I find it funny as heck watching them try to switch back and forth from one narrative to the other during their presentations.

These guys really do believe that paper currency is on life support and when it finally goes you will want to be owning gold.  And you know what?  They just might be right.  Then again, I have a book on the shelf at my office with a similar prophecy of impending doom from an insightful fellow from Zurich…that was written in the 1960s.  Same reasoning and arguments that we see today.  But of course, Western Civilization is still a go as of right now, at least for the moment.

Are they right?  I’m not sure it matters.  Which is really the reason I decided to write on this subject in the first place.

Clearly they’ve been wrong so far, yet the price of gold has continued to rise.  To me that may be the more important data point.

The thing you look for in valuing any kind of asset that fluctuates with market value is the collection of forces arrayed on either side of the price.  When I look at gold, I don’t see a whole lot that points to significant downward price pressure, at least not long-term.   Now, buying an asset at the high is asking for trouble, but that doesn’t mean that 5 years from now the price won’t be even higher (although if it is, buying at some point off the low will give you an even better result…).  So I don’t know if I’d rush out tomorrow morning if I were planning to make a buy.  But other than the inflation inherently caused when there are a lot of speculators in the market, I don’t see a whole lot out there poised to drive the price of gold a lot lower on a permanent basis.

On the other hand, central banks in developing and developed countries are adding to their reserves.  Currency traders are using it as a safe-haven in the face of slow-downs in the economies of Europe and the US.  And those who really do buy into the store of value narrative are adding to their stocks with the same regularity that some people make 401k contributions.

Are the currencies of the world going to fall, leaving gold the last man standing?  I have no idea.  But I can tell you that there are enough people who think they will that their activities are putting some serious upward pricing pressure on gold.  And that pushes gold higher.  Nor does it appear to be going away anytime soon.  Self-fulfilling prophecy?  Maybe.  But the point here is that they don’t have to be right for the price to keep going up.  All they have to do is maintain their belief that it will happen, and give voice to that belief in the form of continuing to enter the market as buyers.

Simultaneously, you don’t have to agree with them to make money in gold.

People have been fascinated with gold for a very long time, and it doesn’t show signs of being a topic that the world is going to tire of anytime soon.  I have no idea if gold is right for you, nor am I recommending that you go and buy some.  But in case you are considering it, I thought you might like to hear another perspective on the matter; one which comes from someone who isn’t drinking the koolaid, but nonetheless sees several paths for how the prognosis for gold could easily become reality.

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