Useless, Pointless Gold
Gold has no industrial use and provides no income. So it's pointless, right...?
PITY the lonely gold analyst.
Yes, we get chance to huddle together every so often – maybe Toronto in September or Hong Kong in October, plus a quick 48-hour jolly for members of the London Bullion Market Association in November (downgraded however from Lima, Peru to Edinburgh, Scotland this year, thanks to credit-crunched expense accounts at the investment banks).
Yes, gold analysts also enjoy a little more air-time – and a little more respect from their equity-desk buddies – than they did 265% and ten years ago. But the word "nut" is still sniggered whenever gold gets a mention in the media, despite beating every other asset-class bar none since the start of this decade.
Why? Because "If you go back 25 years, gold was totally pointless until eight to 10 years ago," as a London equity-fund chairman recently spat to the Financial Times, quoted alongside BullionVault's own analysis of typical seasonal price patterns in gold.
"It isn't the long-term store of value that people think it is," he went on. "It has no industrial use, and provides no income."
In the interests of full disclosure, this chap's firm lost his Global Opportunities investors more than 32% of their money in the last 12 months. That fund came 179th out of 183 such offerings in the sector. The UK Portfolio (15th out of fifteen year-to-July) hasn't even kept pace with inflation since launching in summer 2001. The Gold Price in Pounds Sterling, in contrast, has tripled.
But when it comes to useless, pointless stores of value, who's counting? And as the funds' fact sheets remind us – after stating an aim of "long term capital growth" – "Past performance should not be seen as an indication of future performance."
There's hope for his clients yet, in other words.
Fund management itself, meantime, is a tough, competitive trade where hard work (successful or otherwise) is amply rewarded. Whereas gold analysts start on a hiding to nothing. Because there's nothing to analyze.
There it sits, unchanging at No.79 in the periodic table, untarnished and indestructible. It never promises anything more than to remain unchanged – untarnished and indestructible – tomorrow. And that really is about it. Which is why any useful gold analysis will most likely spend its time talking about everything and anything else, otherwise known as the Zen approach to judging investment.
- Unlike platinum, gold has little use in industry (13% of annual demand all told, versus 47% of 'white metal' demand from auto-catalyst makers alone);
- Unlike government debt, it can't swell in supply, pumping cash into the economy and financing the world's trade imbalances. Unlike common stocks, gold doesn't offer income or earnings growth, making it impossible to value on modern investment metrics;
- Even the cost of replacement is tough to pin down, whipping from $134 an ounce (the mining cost at Barrick's Lagunas Norte in Peru) up to $590 across Goldfield's African, Latin American and Australian output on average.
Not that quality varies, however; fine gold is fine gold (look for 99.5% or better, the Good Delivery standard of the deep, liquid professional market, in which the internationally-averaged Spot Price is acknowledged everywhere, albeit with an occasional premium the further East you move from London). And not that the stuff ever does need replacing, of course. Because as we just said, it's indestructible.
"Gold is chemically inert," wrote the late Peter Bernstein in the New York Times Magazine in May 1960, "and thus it will not combine directly with oxygen. This means it retains its luster and does not tarnish; the magnificent gold jewelry of the ancients may be seen in the museums today shining as brilliantly as though it had been purchased at Cartier's only yesterday."
The result? Best estimates say less than 2% of all the gold ever mined in history has been "lost" – the vast bulk of that buried by ancient types fleeing the Goths, Vikings or marauding English. The outstanding, above-ground supply could meet the next 7,000 days of gold-market demand according to a hedge-fund analysis earlier this decade. Platinum holds the next largest supply at around 15 months, while coffee supplies average 216 days. Natural gas inventories provide for just 37.5 days of required supply worldwide.
On consensus logic, therefore, the more "useful" a commodity is, the fewer days' supply humanity would seem to keep at hand. But that's to miss the unique utility of Gold Bullion – the security, liquidity and diversification which owning it brings.
- Not promising anything, gold should disappoint no one. It's just a lump of inert metal, remember. And in contrast with all other tradable investment assets, physical gold doesn't rely on anyone's word either. (Futures, options, unallocated accounts and trust funds are different again, you'll note.)
- Used to store value everywhere that it's ever been found, gold offers a large but reliably tight supply. Cast into a single cube, the 161,000 tonnes mined in history wouldn't quite cover the length of a tennis court. Each edge of that cube is growing by just 4 inches (10cm) per year.
- Lacking a dominant industrial use, gold uncorrelated – across the long term – to either the stock market or the economic cycle, a handy attribute at times of financial or economic stress. Just check its 50% price-rise since the credit crunch broke in August '07, for instance. Crude oil futures stand almost 20% lower, rolling costs not included. The S&P has meantime dropped by one-third.
Likewise, the funds chaired by that chap quoted in the Financial Times have also shed one-third of their value over the last 24 months. But don't hold that against him or his view. If you do find yourself considering Gold Investment anytime soon, please remember:
Besides tripling so far this decade, and actually rising amid the global banking crisis, while equity-fund investors paid up to 5% initial and then 1.5% annual fees to lose one-third or more of their money, gold is of course useless and pointless.
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