The author of this article takes on one of the biggest arguments against gold, "You Can't Eat Your Gold." He explains that while one can not eat gold, one can also not eat oil, fiat currency, real estate or smart phones. In order to understand gold, investors should focus on what central banks are doing, not saying.
March 6, 2012
The Financial Lexicon
You may have heard the cliché, "You can't eat gold." This trite expression is a favorite among members of the investment community who wish gold (GLD) would go away and who have no sound argument against investing in gold. Instead of presenting any kind of sound argument against gold, or silver (SLV) for that matter, skeptics of precious metals instead resort to platitudes or ad hominem attacks against the person arguing in favor of the metals. I am not as ardent a believer as some investors are in gold and silver's future roles in the world's financial system. However, I am a realist when it comes to all things precious metals, and I understand their historical importance in financial matters. For this reason, I would like to address the cockamamie "You can't eat gold" expression I've heard uttered far too many times during gold's incredible bull market.
The constant disrespect shown by the pundits toward precious metals is understandable. Anyone who enjoys the fruits of the leveraged up, debt and credit driven financial system will certainly not want investors to begin to favor an asset with no counterparty risk and an asset that can't be printed to infinity. They'll also not want investors to favor an asset that is easy to take delivery of and store and one for which physical supply is nowhere near sufficient to satisfy all the claims against it (through futures, derivatives, ETFs, etc.). This, after all, could cause serious problems for the exchanges and for the major financial institutions who favor selling over owning gold and silver. However, if gold isn't the investment for you, at least come up with a better reason why than to state, "You can't eat gold."
Last I checked, you can't eat barrels of oil. You also can't survive by eating fiat currency. You can't eat real estate or your smartphone. You can't eat your car or your clothes. Among a whole host of other things you might spend your fiat currency on but can't eat is an electronic claim indicating ownership in a company (i.e. a stock). What's the point of my mentioning all these things you can't eat? By stating "You can't eat gold," precious metals haters are attempting to distract new would-be investors from understanding that gold (as well as silver) is a store of value. Physical precious metals have no counterparty risk and are therefore anathema to those individuals who believe wholeheartedly in the borrow-and-spend financial system under which we operate today.
If you are a buy-and-hold investor in precious metals, more concerned with the amount of ounces you own than the fiat currency price of the metals, there is likely very little for you to concern yourself with at this time. For such investors, a few things to pay attention to would be the following: be sure to maintain your focus on what central bankers are doing, not what they are saying. Actions speak louder than words, and we've certainly seen our fair share of words being used to distract from reality over the past few years. As long as money printing and central bank buying of gold are the actions of the day, it is likely that one of the greatest concerns for the buy-and-hold precious metals investor will be figuring out how high of a percentage of the portfolio to allow precious metals to climb to. For a discussion on how gold might "go higher" over time, see "The Winds Are A Changin' In Gold." Also, you might find it useful to think through how a reshuffling of the fiat currency value of assets at the top of Exter's Pyramid might change the fiat value of precious metals.
Another concern might be how those in power will react to a world in which gold slowly becomes a greater percentage of investors' financial holdings. Perhaps we will one day experience a modern-day version of FDR's infamous Executive Order 6102, "Requiring Gold Coin, Gold Bullion and Gold Certificates to Be Delivered to the Government." Or perhaps tax policy will be used to make life difficult for owners of precious metals. Only time will tell.
Last, as a buy-and-hold investor in gold or other precious metals, you might, at times, struggle with how to allocate your exposure to the metals. If one of your considerations is whether to buy shares in gold miners (GDX) either through an ETF or through individual companies like Newmont Mining (NEM) or Barrick Gold (ABX), don't forget to spend time examining the political risks the companies might have to deal with in their mining ventures. Moreover, keep in mind that rising commodity prices will push raw materials costs higher, thereby affecting the profit margins of miners. This, in turn, could impact the stock price of miners. Finally, if you do use an ETF to gain exposure to precious metals miners, be sure to thoroughly examine the holdings of the fund. For example, despite being called a "gold miners ETF," GDX also has a decent amount of exposure to companies more typically associated with silver. One such company is Silver Wheaton (SLW), the largest silver streaming company in the world, which is the fourth-largest holding in GDX.
In closing, if precious metals represent your hedge against fiat money, tune out the noise meant to distract you and make you second guess why it is you own the metals. Instead, focus on the actions of those in power. And, most importantly, don't forget that despite the fact that "You can't eat gold," for thousands of years, people have been able to use gold to buy stuff (whether through direct exchanges or by first transferring it into other mediums of exchange). What modern-day fiat currency do you know of about which the same can be said?
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