Recently, both The Daily Show and The Colbert Report mocked the stage-managed hysteria of fear-mongering talk show hosts. The celebrity pundits warn of apocalyptic scenarios in which gold will be the only available currency, then appear in commercials for companies buying and selling gold. Of course, if they really believe their doomsday predictions, promoting gold is no conflict of interest, but the Comedy Central satirists suspect more cynical motives.
Between the mockery of Jon Stewart and the hawkery of Glenn Beck, does gold have a sensible place in an entrepreneurial investor’s portfolio? David Einhorn, President and founder of Greenlight Capital, recently changed his thinking on the matter, as he explained at the October 2009 Value Investing Congress:
“Four years ago I spoke at this conference and said that I favored my Grandma Cookie’s investment style of investing in stocks like Nike, IBM, McDonalds and Walgreens over my Grandpa Ben’s style of buying gold bullion and gold stocks. He feared the economic ruin of our country through a paper money and deficit driven hyperinflation. I explained how Grandma Cookie had been right for the last thirty years and would probably be right for the next thirty as well. I subscribed to Warren Buffett’s old criticism that gold just sits there with no yield and viewed gold’s long-term value as difficult to assess.
“However, the recent crisis has changed my view. The question can be flipped: how does one know what the dollar is worth given that dollars can be created out of thin air or dropped from helicopters? Just because something hasn’t happened, doesn’t mean it won’t. Yes, we should continue to buy stocks in great companies, but there is room for Grandpa Ben’s view as well.
“I have seen many people debate whether gold is a bet on inflation or deflation. As I see it, it is neither. Gold does well when monetary and fiscal policies are poor and does poorly when they appear sensible. Gold did very well during the Great Depression when FDR debased the currency. It did well again in the money printing 1970s, but collapsed in response to Paul Volcker’s austerity. It ultimately made a bottom around 2001 when the excitement about our future budget surpluses peaked.
“Prospectively, gold should do fine unless our leaders implement much greater fiscal and monetary restraint than appears likely. Of course, gold should do very well if there is a sovereign debt default or currency crisis.”
One can make the argument that gold’s value is arbitrary, but it is less arbitrary than other forms of currency, because worldwide market agreement determines gold’s value, whereas a nation’s currency can be devalued by a unilateral decision to print more money. In this sense, gold is like the ultimate “Big Mac Index,” providing a window into the real value of desired goods and services. (Some economists use the price of a McDonald’s Big Mac to compare the relative value of different currencies). An ounce of gold, for example, historically costs about as much as a fine men’s suit.
So gold may offer “no yield,” but its true value is its ability to store value. As such, gold may be the ultimate defensive investment, and does much to calm investors during times of heightened economic uncertainty. In part 3, we’ll look at different ways to invest in gold.