Hoarding gold makes sense only for the hopeless

July 19, 2011

By Robert Cole
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

LONDON — Compared to U.S. equities, gold is expensive. You have to go back to the stagflation of the 1970s — or the depression of the 1930s — to find a time when the yellow metal was more valuable. Today’s worries could push it higher. But only the gloomiest can think gold will maintain its glittering trajectory.

Pictet Wealth Management, the Swiss private bank, points out that the value of the Dow Jones industrial average is currently less than eight times the dollar price of an ounce of gold. That ratio has been lower in the past: it was as little as five during the Great Depression, and during the late 1970s and early 1980s. But during the equity bull market of the 1960s the DJIA was worth 25 times the price of an ounce of gold. At the turn of the millennium, the ratio climbed to 40.

The comparison is far from flawless. For a start, examining the relationship between a stock average and the dollar price of a commodity is enough to make any self-respecting statistician blanch. Moreover, equities generate dividend income, while storing gold actually has a cost. Far from comparing apples with pears, this may be an exercise matching porcupines with parasols.

Even if the relationship withstands scrutiny, the explanation could be that shares are unusually cheap, not that gold is expensive. Western world demographics — which have seen retiring baby boomers shift from equities to bonds — have depressed share prices.

It is also possible that the world economy — especially in the West — will revisit the territory seen in the 1970s, if not the 1930s. The euro zone could yet fall apart, damning economic activity and squashing faith in fiat currencies. The United States is hardly in rude health, and a Chinese hard landing cannot be dismissed.

Still, you have to be pretty bearish to believe the Dow/gold ratio will plumb its previous lows. And even if it reaches that point, the explanation may be falling shares rather than rising bullion prices. Five times the current price of gold, in DJIA terms, would imply a 35 percent drop in the U.S. benchmark. That scenario can only appeal to the gloomiest bears.


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Let’s be realistic here. Gold is for all practical purposes a metal with no use other than for jewelry or in electronics. Otherwise it only has scarcity going for it. It is the latter that provides a degree of security for those loosing faith in currencies. Realistically that isn’t difficult to do in times of uncertainty. As an investment it is possibly the most risky one can place confidence in for growth. Actually gold is a good example of what goes up must come down, especially when wild spikes occur. One has to believe no currency will have value to buy into it during rapidly rising prices.

Today, even if there should be a major crash, gold in the long run is probably a very bad investment with a loss potential of 50% if one buys into it now, just to hoard or even for some perceived safety net. If more than 10 to 15 percent of ones investment funds are place into it you’d be taking a horrible risk.

Posted by USMCPatriot | Report as abusive

Some people go so far as to think that in the event of a crisis they will use their gold to buy things. Let me tell you, if a crisis hits and I have food while you have gold, I ain’t trading.

Posted by iflydaplanes | Report as abusive

Gold avg 250-500 for the last 30 years with the exception of a spike or two and the last few years run up! Be careful folks, about the same odds as a casino experience! Yes, we’re in crisis and it’s an international medium of exchange, but it’s driven by rumors, speculation and fear! Put your faith/trust in God, all others pay for internity!

Posted by DrJJJJ | Report as abusive