No Fool can claim a monopoly on the truth. It's far too elusive, and seldom absolute.
In my two-part series on the top 10 reasons to hold gold, I presented a holistic rationale for exposure to gold (and silver) in the context of a troubling outlook for the U.S. dollar. At the suggestion of several readers, I've now decided to tackle dissenting viewpoints by addressing some common -- and I believe erroneous -- opinions about gold.
1. Gold is a barbarous relic
British economist John Maynard Keynes once argued for an end to the gold standard by characterizing the metal as a barbarous relic. Those words have stuck, and they resonate with those who believe gold's historical role as a currency ended abruptly thanks to President Nixon's actions in 1971, and the subsequent demise of the Bretton Woods system.
CAPS member carcassgrinder opined last October: "Gold is a lot like a bundle of bad mortgages these days, it is only worth something if there is confidence in it's percieved value. Once that confidence drops ... all you're left with is a rare, soft metal with very few practical uses."
I would argue, however, that such toxic bundled mortgages share far more in common with the U.S. dollar: Both are backed by nothing but debt. The value of a dollar, likewise, is subject to confidence in its perceived value. Once that confidence drops, all you're left with are paper portraits of past presidents who would have battled against the issuance of un-backed fiat money in the first place.
As confidence in the world's leading fiat currencies erodes, gold's immutable role as the universally recognized alternative to paper money is plain for all to see. Whether it's in the tripling of gold prices since the dollar began to tumble in 2002, China's timely expansion of its gold currency reserves to 33.9 million troy ounces, or the introduction of bullion ETFs like SPDR Gold Shares (NYSE: GLD) and gold futures exchanges from Dubai to Shanghai, in practice, gold's relevance as a currency cannot be cancelled by a short-lived preference for paper.
2. Gold is driven only by speculation and fear
I have encountered no shortage of investors who state that they avoid gold because its value is purely speculative, or because demand is based primarily upon fear. While many gold investors are indeed concerned about the potential implications of uncontrolled deficit spending, to categorize gold investors as speculators is to ignore the roughly 33% decline in purchasing power of the U.S. dollar since the beginning of this secular bull market for gold. There is nothing speculative about $56 trillion of U.S. debt (including entitlement programs), nor even the defensible expectation of substantial inflation resulting from massive fiscal interventions.
To claim that speculation and fear are not in play, however, would be disingenuous on my part. To the contrary, there are moments when fear drives investors into gold too abruptly for short-side speculators to resist; I attribute much of gold's volatility to such market dynamics. Fear and speculation may influence some of gold's near-term swings, but this multiyear secular bull market can't be pinned on human psychology quite so conveniently.
3. Goldbugs are crazy
I resist the label gold bug because of the derogatory intent of the phrase. As an anthropologist, I'm fascinated by some gold detractors' tendency to cast aspersions upon gold investors, rather than debating the facts. Please, don't shoot the messenger! Central banks, sovereign wealth funds, hedge fund managers, insurance companies, and millions of investors surely can't all have lost their minds. This line of thinking is simply not constructive to a reasoned debate about gold.
4. Gold is a commodity
Gold is money, first and foremost. While it's true that one might struggle trying to pay for groceries with bullion, one can no more easily pay for gas here in the U.S. with Swedish krona. Gold trades on commodity futures exchanges alongside pork bellies, and it is indeed prized both as jewelry and in electrical components. Gold shares many traits in common with commodities, but to ignore the ways in which gold differs from commodities is to misunderstand gold altogether. (See myth No. 1 above.)
5. You can't make money in gold
It's one thing to recognize gold as a store of value, but another to see its profit potential. Gold-mining equities offer precious leverage to long-term price appreciation. A balanced basket of miners -- including major producers like Goldcorp (NYSE: GG) and Newmont Mining (NYSE: NEM), flourishing intermediates like Agnico-Eagle Mines (NYSE: AEM) and Yamana Gold (NYSE: AUY), and a sampling of budding juniors like Jaguar Mining (NYSE: JAG) or New Gold (AMEX: NGD) -- may warrant serious consideration as a successful recipe for growth, especially when broader equity growth proves as elusive as a single concrete truth.
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