Dueling Fools: Gold Bear

Throughout recorded history, gold has been a tremendous store of value and hedge against inflation. I understand that. In fact, I prognosticated that 2007 could be the year when Fed Chief "Helicopter Ben" Bernanke would usher in the newest round of stagflation, thanks in large part to his attempts to weaken the dollar. With a background like that, hedging against inflation would seem a prudent thing to do.

Still, there's a long leap between "store of value" and "great investment." Mistaking one for the other is how gold investors got hurt after the gold run during the stagflation of the late 1970s. Gold has a lot of problems that keep me from ever wanting to own the metal itself.

First and foremost, it's an expensive asset to keep. The companies I partially own nearly all pay dividends, effectively paying me to invest in them. Gold, however, requires you to pay storage fees and insurance, or at minimum, live with the paranoia of knowing you've got a precious metal lying around your house. And that's not to mention the significant bid/ask spreads that individual investors must pay to simply exchange cash for actual pieces of that yellow metal. Every dollar you spend keeping your gold safe is a dollar you've lost trying to "preserve" your wealth.

Additionally, there's the very real fact that gold itself doesn't do anything. Sure, it has some industrial and jewelry uses, and it's been used as a currency since time immemorial. But as a wealth creation mechanism, it's pretty useless. On the flip side, Merck's (NYSE: MRK  ) Singulair literally keeps me breathing. General Electric's (NYSE: GE  ) power turbines keep the lights on in my house. And the nearby Kroger (NYSE: KR  ) helps my family eat without resorting to subsistence farming.

I can't imagine circumstances under which people wouldn't want to breathe, turn the lights on, and eat. Even if inflation runs rampant, any cost increases felt uniformly throughout the economy will be at least partially passed on to consumers by businesses. That alone will likely help protect some corporate value, at least among companies in crucial industries.

Finally, let's not forget that gold is a mined commodity, with supply and demand determining its market price. Producers all tend to try to dig up as much as they can when the prices are high. Gold prices recently rose to the neighborhood of $672.80 per ounce -- a pretty strong signal to produce. Consider the incentives these gold-mining giants all have, since they're reporting cash costs in the neighborhood of $300 per ounce:

Company

Cash Costs
per Ounce

Gross Margin
(Gold @ $672.80/oz)

Yamana Gold (NYSE: AUY  )

$326

51.55%

AngloGold Ashanti (NYSE: AU  )

$308

54.22%

Newmont Mining (NYSE: NEM  )

$304

54.82%

Barrick Gold Corp (NYSE: ABX  )

$282

58.09%

As long as gold prices continue to exceed their costs to produce, these miners literally dig up money. If you really think gold prices will to stay high -- or even rise further -- and you want to get in on it, why not buy a miner instead of the metal? After all, the miners' success is levered to the price of gold; the higher it goes, the more they make per ounce. Don't forget, either, that unlike the significant costs you would incur by owning gold the metal, successful gold-mining companies actually pay their shareholders in dividends.

A Fool's final thoughts
Whether you're looking for an inflation hedge, or you simply want to speculate on the price of gold, you've got options other than the yellow metal itself. Don't get suckered into buying an expensive hunk of commodity metal after its run to the stratosphere. If civilization somehow collapses, we'll all have bigger problems on our hands than trying to barter with gold. Absent any Mad Max scenarios, you'll likely be better off investing to build your wealth, rather than merely trying to preserve it.

You're not done with the Duel yet! Go back and read the other arguments, then vote for the winner.

Fool contributor Chuck Saletta really likes breathing and eating. Sometimes, he does both at the same time -- with the lights on, no less! At the time of publication, he owned shares of General Electric and Merck, and his wife owned shares of Kroger. The Fool has a disclosure policy.


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