An apparent economic recovery and a recent tumble in the price of gold has investors wondering if the precious metal has lost its place in a portfolio.
Gold, having soared higher since the onset of the financial crisis, is down about 17 per cent from its September peak, and has fallen 7.5 per cent in less than a month. In large part, gold’s comeuppance is attributable to improving economic data and a sense that - terrible as things may be in Europe - the banking system will not implode.
So, then, if the world’s not ending why own gold?
Arguing the case against gold ownership is none other than Warren Buffett, who argues for equities and calls gold a non-productive asset. Why hold gold, which never innovates, never increases profit margins and never opens up new markets?
“If you own one ounce of gold for an eternity, you will still own one ounce at its end,” Buffett wrote in his most recent annual letter to shareholders.
“This type of investment requires an expanding pool of buyers, who, in turn, are enticed because they believe the buying pool will expand still further. Owners are not inspired by what the asset itself can produce - it will remain lifeless forever - but rather by the belief that others will desire it even more avidly in the future,” Buffett said.
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Gold, Buffett correctly points out, has benefited first from a fear trade, bought up by investors who worry that central banks and governments will engineer a raging inflation in order to erode away the debts they struggle under.
Secondly, as with all assets that rise sharply in price, gold has gotten a push higher by momentum buyers, those who add their money to the rush in hopes of getting out when the trend wanes. Remove those supports and gold should fall, sharply and rapidly.
The backside of QE
Buffett is surely right about gold’s inability to procreate or grow, but I think he presents the fear trade as too much of an all-or-nothing bargain. Gold is a kind of anti-investment, an insurance policy against the bad actions of other people.
Sure, it won’t invent a new widget and make you rich, but neither will it, like some company executives, overpay itself and re-price its share options.
It is reasonable, given the recent run of data, to think that another round of quantitative easing is less likely in the US That surely must reduce the current value of gold, which unlike dollar bills can’t be made to come into existence by a central banker.
But it is important to remember that the impact of quantitative easing (QE) isn’t over simply if the Fed no longer prints money. There is still the issue of how to retract the huge amount of liquidity from a recovering economy.