Gold's Track Record

By: Douglas_French

Anyone who has bought gold for the entirety of this bull market is always looking for signs of a top. Not to sell — one doesn't get rid of their insurance — but just to wait until the insurance goes on sale.

A price steadily holding over $1,400 per ounce (until the Japanese quake) has put gold on the cover of a few magazines, along with constant hawking of the yellow metal on daytime Fox News.

But there seems to be more talk about owning gold than the actual owning of it. Chris Blasi's work indicates that precious metals only made up 2 percent of investment assets at the end of last year after a decade-long bull market. At the same time, investment in real estate has remained constant despite the huge downdraft in property prices, meaning that investors continue to pile into this overbuilt sector.

In its "Wealth Adviser" section, The Wall Street Journal recently featured a striking above-the-fold, half-page image of gold bars stacked in a pyramid, with short gold facts etched on the ends of the bars — tidbits like "Site of world's largest accumulation of gold: New York Fed," and "Value of 2010 world gold sales: $150 billion."

Being editor of the "Wealth Adviser" section, Lawrence Rout enlisted the services of a couple financial experts to debate "The Case For and Against Gold." This is the sort of splashy attention that normally gives gold bulls pause. Editor Rout explains that the combatants were to defend every argument and that "they offer a deep dive for any investors thinking about taking the plunge themselves."

However, the debate was anything but a backyard brawl. Certified financial planner Janet Briaud carried the baton for the buy-side argument, making the usual tired points about crisis investing, uncertain times, and "black-swan" events.

Her insight that "we could very well see deliberate weakening of currencies in many developed countries" is not exactly a news flash. And then she goes on to contemplate gold as a reserve currency with central banks buying the metal, which is already happening. Ms. Briaud does make the point that gold has been recognized to have value for thousands of years by various cultures and that while investment in GLD (the gold exchange traded fund) has gown mightily, it makes up a infinitesimal percentage of financial assets held by households and nonfinancial businesses.

So, how much gold as a percentage of one's portfolio does CFP Briaud think the responsible investor should have? Five to 10 percent.

Five percent is the same allocation that Lew Altfest recommends for investors to hold provided "they promise to hold it rain or shine" (Altfest's emphasis). Mr. Altfest, enlisted to argue against owning the yellow metal, has his own wealth management firm and is a finance professor at Pace University.

"Whether you're negotiating with an uneducated thug guarding a border that must be crossed in the middle of nowhere, or sitting across the table from the most sophisticated investor in the world, gold is the universal language and has been for eons."

Gold has no use other than being pretty, the Pace professor says. It's not a real investment like stocks, bonds, real estate, or private businesses. If the world were falling apart, maybe it would make sense to own some gold he says, but, writes the money maven,

Economies are generally improving world-wide, and inflation, while of some difficulty in a few countries, is not currently a problem in the biggest one, the U.S., nor should it become a really serious problem in the future. No need to call in the gold troops here.

Later on in his gold attack, the professor throws out this laugher: "I don't believe any major nations will seriously pursue a consistent decline of their currencies over an extended period of time." What does he suppose these nations have been doing already? Remember, Mr. Altfest manages money for a living in one of the world's financial capitals and teaches students about finance.

He then questions the ethics of gold mining (at the WSJ's suggestion, I assume, since Ms. Briaud also mentioned ethics). The benefits are few, he writes and, "Very little of the production takes place in the U.S. or is owned by U.S. companies, and this doesn't help our unemployment problem." Since when is the question of whether an investment helps or hurts US employment a valid consideration in portfolio management?

Mr. Altfest must exclude any foreign companies from investment consideration. And, while there is no mining going on in Manhattan (other than money from investors' pockets), plenty of people in Nevada and Alaska make a good living working in the gold-mining industry.

The yellow metal is often mentioned as the commodity to trade with for one's freedom. When asked what he thought about gold as an investment, financial talking head Ron Insana snidely told talk-show host Laura Ingraham, "Sure, everybody should keep some gold on hand to bribe border guards." Insana wasn't intentionally making the best case to own gold. But what's more valuable than something that is, and has been for centuries, universally recognized for its value? When your life depends on making a trade, gold is what you trade with. "It is the last refuge of the desperate," writes value investor Jeremy Grantham, who says he hates gold.

Mr. Altfest doesn't get it, and neither does Ms. Briaud for that matter. Whether you're negotiating with an uneducated thug guarding a border that must be crossed in the middle of nowhere, or sitting across the table from the most sophisticated investor in the world, gold is the universal language and has been for eons. Sure, gold does nothing but sit pretty, failing to generate earnings or pay dividends. But it's portable, durable, and divisible, with a highly recognizable value; it's highly marketable and homogeneous, and its supply is stable: the perfect money.

The WSJ feature provides a wonderful timeline. In 4600 BC, civilizations began using gold as jewelry. Squares of gold were used as money in China in 1091 BC. The first gold coins were minted in what is now Turkey in 560 BC. And so on. That's a track record.

Concluding his case against gold, Altfest writes that if he "were a border guard today who received a 'gift' of gold, I would cash it in and buy stocks." There may be a day when the professor/money manager needs to buy his way out of New York. I hope he seriously doesn't think he can get the job done by slipping a stock certificate to the border guard.

Douglas French is president of the Mises Institute and author of Early Speculative Bubbles & Increases in the Money Supply. He received his masters degree in economics from the University of Nevada, Las Vegas, under Murray Rothbard with Professor Hans-Hermann Hoppe serving on his thesis committee. See his tribute to Murray Rothbard. Send him mail. See Doug French's article archives. Comment on the blog.

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