Part One: Is investing in gold good?

A colleague once told me a funny description about what the gold trade is in essence: Someone digs a hole to take gold out. Then this gold is taken out, refined, and transported to a bank – where it is essentially ending up in another hole. So in essence, he concluded, one could leave the gold where it is and just sell shares of that gold to people. Same effect, but you don’t need to dig holes.

Well. That story had an intriguing point: A lerge share of mines gold isn’t really 'usable' once it sees the light (even though that is not totally true, because jewellry makes up a considerable chunk of produced gold, and, in fact, a portion even goes to industrial use). But even if it were true, would people, even in theory, accept such a deal? Owning shares of gold  - even though it sits underground? Leaving some metallurgical thoughts aside (e.g. the gold below the earth isnt’ of bullion quality – it needs to be separated from ores and some other ingredients like copper), my guess is: They wouldn’t. No matter if it would or wouldn’t make sense.

 This combination of promise also made it the choice for storage of value, providing a safe heaven in times of crisis. One could have decided basically for many other alternatives. Chromite or vanadium are both rarer than gold. But they look like crap. Who would want that? So, this is an important lesson when dealing with gold: It is above and beyond the rest of minerals and metals, and in a way always will be. This is not the same as saying it will always yield more than others – in the past it often has failed to do so. But it still keeps its position as eternal storage of beauty and wealth.

So ok, it looks nice – but what do I get out of it?

Now, let us look if it also makes sense to buy and keep gold from an investment perspective. Taking your bath in gold coins might be a fun thing if you have enough of them. But buying coins in order to be able to afford more of them in the future? That might not happen as such.

This is also why I would separate the aspect of investing in gold into two categories:

That brings us also to lesson no.1 in investing: You need to know what you actually want.

Fun fact: You may want more than one option – and that is also ok.

Fun fact 2: Gold is probably the only commodity that allows you this separation. I have at least never heard about someone investing in bitcoins to protect a portfolio against economic crisis. Or..do you know anyone who is hording pure cobalt metal bars under his bed?

Let’s start now with category 1.

Stability amidst Economic Unrest

The global economic landscape is in constant flux, with political and economic events triggering frequent market swings. Politics is many Western countries in the last years has also shown its potential and willingness to aggravate crises, reducing periods of stability even more. In such an unpredictable world scenario, gold has proven to be a reliable asset. World crises, be it wars, inflation or…just the fear about either of them, will send investors rushing towards gold (making its price go up, whereas other assets like stocks go down: hence the stabilization mechanism). It remains a safe haven, recognized worldwide for its proven capacity to hold onto value when other assets crumble. Pharao Amenophis I thought so – and so can you.

But even if you just want to hedge – everyone who owns gold is also interested about how it will be doing as a keeper of value over time. Hence, what value will your Krueger Rand have in the future? You will meet all sorts of ‘gold experts’ on the internet telling you that due to the immediate arrival of Marsian troopers, gold will soon be above USD 5,000 per ounce.

My approach concerning the actual value and value development  is more modest:

When asked what income your ounce of gold will yield in ten years, I have a good answer: Think about what you could buy today with one ounce (which is today roughly around USD 2,000): A tailor-made suit, for instance, maybe even with a nice pair of leather shoes included.

That, my dear reader, you will also be able to buy with your ounce of gold in ten years. So, my main argument for looking at gold as a means of stability is really this stable purchasing power. Owning physical gold is not so much about speculating for a price increase. That might sometimes work too, especially ahead of a crisis – but most people hord physical gold for its stability aspects. Of course, and this is what I will be describing in the second part of this blog, buying physical gold or gold ETFs on a regular basis can also help to amass considerable - and stable - wealth. 

Speculating on gold price increases through buying physical gold  however is something that is not very common. What I mean is the intention to really send your portfolio skywards due to a sudden increase in the value of gold. As I said, it could work when a major crisis is unfolding, and asset owners flee to gold. But,  in my view, when you speculate on something, there are better ways to do that. Because even in such cases of a correctly anticipated crisis (in which secret service are you working, eh?), gold may raise some 10, 20, 25%, but that’s mostly it.

I am not saying that 25% are bad, and that you shouldn’t do it, but it doesn’t seem the right way of using physical gold. It is a bit similar to pushing a 35 year old Jaguar XJS V12 Convertible hard on the autobahn. This car still does its 250km/h, but….its just doesn’t feel right.

Why the hedging with gold process works

So we can note that yes, gold will remain stable in price, and probably also could see occasional upswings. That makes it attractive to bolster your portfolio with the help of gold. Because if a crisis should occur, be it another global recession or localized economic upheaval, it will invariably wreak havoc on most investment portfolios. However, gold tends to retain, and in such times often increase its value during these troubling periods. The reason? It's a tangible asset, not impeded by changing economic trends and can't be diluted or devalued. Gold is not reliant on a company's performance or subject to government regulation, making it resilient in times of financial turbulence. Also, it can't be created at will. You will need to search for it (which costs money and time), and then you will have to mine it (which costs more money and more time). In times of crisis, asset owners want exactly these non-inflationary aspects of gold, buy more of it and hence drive prices up.

So, the hedging function of gold makes absolute sense. Many financial experts suggest a round-about 10% share of your portfolio that should be in investment-level gold, also called ‘bullion’:

The mid- to long term outlook for gold is very positive

But there's another reason why gold stands firm as a remarkable investment choice, and that is the increasing supply/demand gap. With gold in increasing demand – not only caused by its ability to hedge, but also to supply a growing global upper-middle class with jewelry and category 2 investments (more about that in part 2), we have reasons to believe that supply won’t be able to follow.

Are you familiar with peak oil?  That is the theory that  humanity has reached a point where the (economically) exploitable and geologically given reserves of oil have reached their peak, and that the overall quantity that can be extracted is getting increasingly lower from this point onwards, sending the world into a permanent status of undersupply. As far as peak oil is concerned, the exact ‘peak point’ however seems to move from one year to the next. It might come sometime, but  not in 2024, and probably also not in 2025.

The case is different with gold though. Indeed, I am arguing that we have reached ‘peak gold’, and that we will be finding fewer deposits, and, what's more alarming, is that these come with an increasingly diminutive gold content. This is at least what a careful look at the data concerning new deposits, quantity of these deposits, and overall gold mined out of these deposits is showing: Gold is getting less, and cheap gold is getting even lesser!

What is adding to this story is the fact that this is happening DESPITE the fact that the budget to explore for new gold deposits is steadily increasing: In short, it gets more and more expensive to find and mine less and less gold.

END OF PART 1

CONTINUE HERE FOR PART 2