The Apocalyptic Sweet Spot for Gold Bugs

Your humble blogger occasionally likes to poke some fun at “gold bugs” — those actors that decide to hoard gold and the commentators who misperceive the situation. 

I see I have some company this a.m., as the Guardian‘s Suzanne McGee puzzles out why people are continuing to hoard/buy gold despite its falling price: 

For centuries – even millennia – people have turned to gold in times of trouble. Its advantages remain numerous: it’s ultra-portable (no matter how far they roamed, Marco Polo or famed Moroccan traveller Ibn Battutah could use gold to buy food and shelter for themselves and their camels); it’s fairly lightweight relative to its value; it doesn’t spoil over time. Heck, it doesn’t even tarnish.

But gold is very different from other commodities in which people can invest. You can use corn to feed livestock or make Corn Flakes; copper has countless industrial applications, from power transmission wires to building material; and many of us rely on coffee to jump-start our working day.

Gold, however, doesn’t have this kind of “fundamental” demand. Sure, die-hard fans of the precious metal will argue that the transformation of gold into jewelry represents a kind of end-user demand, especially in countries like India. The problem with that argument is that, for the most part, jewelry is simply a decorative form of gold coins and bars. It’s still serving the same role: preserving wealth.…

So why own gold at all?

It boils down to fear – or at least, to emotion. After all these centuries, gold’s price still depends largely on how people feel about other investments, wether [sic] they be stocks, bonds, real estate or industrial commodities – and how they feel about the broader economic environment. “Gold is a place where people go when they are scared of other assets,” says Uri Landesman, president of the hedge fund Platinum Partners.

I’d even push back on the portability point somewhat — below a certain level of value, the portability argument seems valid, but as any devotee of the fake game show Gold Case knows, “gold is heavy.” The point is, if a real apocalypse happens — the kind where law and order break down and cats and dogs start living together — having a giant cache of gold won’t do the owner much good. It’s still pretty heavy and, to get all Marxist, has very little “use-value.” 

Indeed, if you think about it, for gold to be a smart large-scale investment, you need a kinda sorta apocalyptic sweet spot. On the one hand, there has to be sufficient levels of discord and inflation fears for a non-interest-bearing asset to look attractive. On the other hand, there has to be sufficient levels of stability such that the gold can still be protected and used as a medium of exchange and store of value.

And looking at the last five years, one can see when exactly that sweet spot appeared to be met. 

So it looks like the immediate post-2008 years were the one time when it really made sense to invest in gold. There was just enough economic uncertainty and wildly exaggerated fears of inflation that it seemed worth it! 

The thing is, gold bugs tend to hold that precious metal for way too long … whereas sensible investors find interest-bearing assets that, over the long run, vastly outperform gold. 

Still, as talk of U.S. government default re-enters the lexicon, I’ll tip my cap to the gold-buggers who, in October, might experience a brief uptick in their portfolio. But no matter what Glenn Beck tells you, remember — for large caches of gold to be useful, the apocalypse can’t go too far.