Harsh Words on Gold

April 23, 2013

Gold always struck us as a very weird investment.
-Christian W. Thwaites, president and CEO, Sentinel Asset Management

As a graduate trainee in a London accepting house in the fall of 1981, I was given the tour and history of my new, 130 year old bank. It was one of the banks that set the daily gold price and had large bullion deposits somewhere under its location at 114 Old Broad Street. But the tour stopped at the vault door. No one went further (probably someone did but it was beyond my pay grade) and further discussion discouraged. Such was the mystery of gold.

Gold always struck us as a very weird investment. Sure it has this allure (itís finite, durable, inflation hedge, the more ominous the world, the better for gold and so on) which can attract aficionados. Part of its reputation as a hard money tool is bunk. The Gold Standard that became the stuff of legend, from around 1870 to 1914, proved to be a very painful way to correct current account imbalances and led to several prolonged depressions and panics in any number of countries.

The recent obsession with gold had three phases: i) the 1970s rush when a production shortage (think Apartheid sanctions) led to a speculative bubble which took 20 years to clear and paved the way for ii) a Yale study in how, from 1959 to 2004, the risk premium for commodities was essentially the same as stocks but they were negatively correlated so you should jump in with new exciting vehicles in the form of iii) ETFs which quickly accumulated 84m oz of gold or about twice the entire circulation of Krugerrands. They also have a very weird third-hand claim on the gold if you care to read the prospectus. Short version: you donít own gold when you own an ETF.

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