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Precious Metals


“It 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”. – Warren Buffett

Q2 2022 hedge fund letters, conferences and more

Precious Metals

Gold deserves a post because it’s such a unique asset. There are many ways to think about gold.

There’s gold, the physical shiny metal. As you already know it makes really nice jewelry. Everybody likes gold. It’s beautiful. It’s timeless. It’s universal. If I could take a time machine and go back two thousand years, my gold would buy me some nice things. It’s safe to say that the lust for gold will be there in the future too. People have pursued gold for centuries. Medieval alchemists tried to turn metals such as lead into gold. People have killed each other for it. Scrooge McDuck has a money bin full of gold where he dives in. It makes people dream. And most importantly it makes my wife happy.

There’s gold, the industrial input. Because of its inherent properties some gold is used in certain industrial processes. Gold conducts electricity and does not tarnish. There’s a little bit of gold inside the iPhone and in some people’s mouths (it doesn’t rust).

There’s gold, the lingos that central banks stash in their vaults. Central banks use gold to diversify their reserves. Central banks hold a lot of the gold ever mined. Gold can back a currency that is subject to swing in value. Gold carries no credit or counterparty risks, it serves as a source of trust in a country. I’ve been in the basement of the Federal Reserve Bank of New York (my idea of fun in NY) where they pile gold bars, it’s nice.

There’s gold the obsession. Some people are nuts about gold. They are called “gold bugs”. They are die hard believers in gold. They advocate buying gold against an anticipated collapse in the currency or the world. They have cult-like behavior. They have a distorted view of the world and they believe it. That’s what makes them very convincing. Gold bugs say that you should hold gold in case the “world goes to hell”. The parameters of what that means is quite large, but if it’s related to surviving, I lean towards guns, gas, food and water. With that gold will come your way.

And there’s gold the investment. Gold is often touted as a “safe haven”. A safe-haven is where investors stash their assets when share prices crash, economies collapse or when inflation wipes-out a currency. A safe-haven is supposed to preserve their owner’s capital. Safe-havens are supposed to hold their value when nothing else is. Other safe-haven assets could be physical things like land, real-estate, art or other precious metals. You can print money, but not gold, or land.

Gold has been prized as a store of value for millenia. But can it be trusted? At time of writing, you could argue that the world is not in a good place. We have many malign forces suggesting to park your assets in gold. We are in a period of intense geopolitical risk, we have a war in Europe, we have a pandemic, the economy might fall off a cliff, we have massive environmental problems, governments are running massive deficits, central banks are printing way too much money, we have high inflation, and we have real-negative interest rates. Basically the gold bug’s list has been check marked and yet gold price is down 3% since the start of 2022. What else do you need for gold to perform?

Yes, gold makes nice jewelry and looks impressive in a vault. But it doesn’t have an income stream. It doesn’t pay interest. It’s hard to value. It’s hard to use for everyday spending (it’s heavy). You need a safe to store it. You need insurance. Gold doesn’t always perform when it’s supposed to (like in moments of high inflation and crisis). Over long periods, gold has been a poor asset to own. It’s inconvenient.

I’m not dismissing gold. I have seen gold at work. When I was abroad in countries like Cambodia and Vietnam, a lot of locals kept their assets in gold, other precious metals or in US dollars. First, the last thing you want is stashing your capital in local currency that is eaten away by inflation. Second, you risk having your emerging market currency not being recognized. Try showing up at your local North American bank branch with a bag full of Cambodian Riel notes, they might hand you a recycle bin. You might say it’s not fair, but turn the table around, do you want somebody to hand you a bag of Cambodian paper or US bills? And third, a lot of these countries have capital control in place, making it harder to move your money internationally. That’s gold at work. I don’t blame them. I would have done the same thing as them if I was in their shoes.

Fiat currencies have major flaws. Inflation is brutal on purchasing power. We all heard the story of what grand-pa could buy with $1 in his youth. Governments renege on their paper promises. Economies are mismanaged. Some default. Some are invaded. But there’s one currency that’s king: that’s the US dollar. Why?

Because the US dollar is the world’s reserve currency. The US possesses unique strengths. It has the strongest economy and the greatest capital markets giving the US an edge on global capital flow. Everybody loves the greenback. For those that’s saying that the US dollar is worthless, I don’t see any of them throwing it in the trash.

Sustaining the world reserve currency achievement will be a challenge. I don’t know one hundred years from now but today that US dollar is what makes the world go round. Despites the massive deficits and the money printing, you rely on the full faith and credit of America’s Treasury Department (they pay their debt). Sure, we can trash the US and their “worthless” paper, but we both know that you or anybody will accept my US$20 bill without hesitation.

Money can take many forms. Monetary systems evolve. In the past we used cowry shells. We had the gold standard at one point where the currency was fixed in terms of a specified amount of gold. Maybe in the future we will use some blockchain cryptocurrency thing.

Inflation is a major issue for cash. Maybe stashing all capital in cash or gold is not a strategy, but you can buy assets that grow and produce income. Here’s an example to make my point. You probably never heard of  Ronald Wayne. He’s the little known third co-founder of Apple, with Steve Wozniak and Steve Jobs. The Steves were kids in their 20s when Apple was founded in 1976 and Ronald, almost twice their age, acted as the “adult” in the room. After 12 days he bailed and sold his 10% stake for $800 and used it to buy gold. In a 2014 Bloomberg article, Wayne said that his savings have been in gold for 40 years and lives off of his Social Security checks. At the time of writing, Apple is a $2.4 trillion company. A 10% stake would have made him one of the richest man in the world. As for his gold stake, I’m going to be generous and estimate he doubled his money.

Obviously I’m cherry picking the example and hindsight is 20/20. It’s never that easy. I could easily write a story about somebody losing all their money in the stock market. Gold does have its moments, like in the 70s. Gold does have a spot in your portfolio. Gold is intended to serve as a potential hedge against adverse markets. It should play a stabilizator role.

My point is that buying high quality assets at a reasonable price that produce income that grows with inflation is a superior way to storing your capital in gold or cash (or other physical things).

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