Last Thursday, shortly before jazz on Brandon’s Beach, I overheard two young men discussing various investment opportunities. Unsure of whether to join the conversation, out of sheer curiosity, or proceed to the jazz session, I paused awkwardly –– to a few side glares.
The pleasure of listening to jazz with a companion eventually outweighed that natural curiosity. Though I didn’t hear the gentlemen discussing gold, that was my motivation in penning this piece. Hopefully, it is still relevant, as some local investors and financial institutions bought gold and may have suffered as a result.
Those surrounding me know that I have always disliked the idea of holding physical gold, or even buying it for a short-term trade. Thus, one of our first gold trades was to sell gold back in 2011 near the highs of $1,900 an ounce. Unfortunately we weren’t bearish enough on gold, and long ago closed our sell position.
It is comforting to know that we are on the same side as Warren Buffet, who also dislikes the idea of buying gold.
My favourite quotes on gold from Warren Buffet:
Gold gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.
Put in different words Warren Buffet is saying that we should invest in assets that have some intrinsic use. When you invest in gold, you are merely hoping that someone else will buy it from you at a higher value.
The major asset in this category is gold, currently a huge favourite of investors who fear almost all other assets, especially paper money (of whose value, as noted, they are right to be fearful). Gold, however, has two significant shortcomings, being neither of much use nor procreative.
True, gold has some industrial and decorative utility, but the demand for these purposes is both limited and incapable of soaking up new production. Meanwhile, if you own one ounce of gold for an eternity, you will still own one ounce at its end.
What motivates most gold purchasers is their belief that the ranks of the fearful will grow. During the past decade that belief has proved correct. Beyond that, the rising price has on its own generated additional buying enthusiasm, attracting purchasers who see the rise as validating an investment thesis. As “bandwagon” investors join any party, they create their own truth ––
for a while.
It should be noted that, amongst professionals, gold is losing its “safe-haven” status. The idea that in the event of a major global crisis gold will retain its value has been proven as false. In that scenario, everyone would be trying to sell their gold, as it has no practical use, thereby pushing down its value.
If you still aren’t convinced, that is fine; since I also have some wonderful news for gold buyers. This is my “advice”: gold has to, at some point, bottom! A big hint is that when it eventually bottoms (in my opinion and this is no way investment advice since I don’t even currently buy gold), it will have some industrial value. Unfortunately the current market price is still $300 above that industrial price mark.
Once above $800 to $850, gold has little or no industrial value. Please note that I am not saying that this range will be the bottom. It is, however, the area where I start to have zero interest in selling gold.
My advice as always is that there are better investment opportunities. I even prefer bitcoins –– although it should be noted that bitcoins’ economic value is extremely difficult to measure and, of course, bitcoins may be volatile at times.
This isn’t to say, however, that bitcoins have no utility or no real economic value. I will leave that to our local bitcoin exchange to explain next year –– hopefully.
This will probably be my last article for 2015; so here is to wishing you and yours a merry Christmas and a happy New Year.
(Craig Harewood is the investment director at Ourinterest Inc.,an investment company that trades on global markets and from time to time assists businesses
and boutique investors. To learn more about Ourinterest’s financial products, and receive weekly financial tips, follow Ourinterest on Facebook (https://www.facebook.com/ OurinterestINC). For access to our quarterly newsletter, simply email [email protected])