GOLD’S 10 COMMANDMENTS

I thought this post by Izabella Kaminska at the FT was particularly good.  In it she expresses some of her frustrations with the reasoning of goldbugs:

“Goldbugs don’t just believe in the fundamentals of gold. They worship at the altar of gold.

The goldbug view represents a market philosophy, a doctrine and a belief-system.

Question it and you incite anger, rage, ridicule.

For ‘non-believers’ this can be frustrating. It’s impossible to have a rational discussion on the subject because goldbugs inevitably intervene with ‘ absolute’ views, none of which are open to adjustment. They stick to those absolutes, even if the facts don’t fit support the narrative.

One might say the following 10 commandments reign at all times:

1) Thou shalt not have any other money than gold.

2) Thou shalt not make paper idol money.

3) Thou shalt not call bullion a relic ever.

4) Remember the day Nixon broke the gold standard.

5) Honour thy gold reserves.

6) Thou shalt not suppress the gold price.

7) Thou shalt not borrow gold from another man.

8 ) Thou shalt not steal another man’s gold.

9) Thou shalt not bear false witness against gold or talk down gold.

10) Thou shalt not covet another man’s gold.”

Reminds me a lot of what Howard Marks said last year:

“My view is simple and starts with the observation that gold is a lot like religion. No one can prove that God exists . . . or that God doesn’t exist.  The believer can’t convince the atheist, and the atheist can’t convince the believer.  It’s incredibly simple: either you believe in God or you don’t. Well, that’s exactly the way I think it is with gold. Either you ’re a believer or you ’re not.”

Anyhow, at the risk of starting a war of words here I’ll just let the readers decide what they think about gold.  I’ll summarize my position as such:

1)  Gold will never work as a global currency – single currencies don’t work without government intervention (which defeats the purpose of the gold as currency argument).  See Europe.

2)  Gold IS money.   Anything so broadly accepted as a medium of exchange is money.  End of story.

3)  Gold should never represent a substantial portion of one’s investment portfolio (over 5%), though this does not mean it has NO place in a portfolio.   I fall along the lines of Howard Marks and Buffett to some degree here – any asset that doesn’t generate cash-flows is hard to value and nearly impossible to manage risk around.   But an investment portfolio should not only contain growth vehicles.  At times, it should contain assets that negatively correlate and help to reduce overall portfolio risk.  Gold fits this story given the right environment (e.g.,  as a negative real interest rate environment has proven).