“Gold,” said the Swiss private banker, lowering his voice to a conspiratorial whisper, “is a very promising investment for the next few years ahead.”
He had the looks of someone deeply pleased with himself when initiating a valued customer to such deep knowledge. Who would object?
Strictly speaking, he was doing his job: helping clients to decide where to put their savings. And he was acting on his personal convictions, not peddling some in-house products of dubious quality.
Yet it was very problematic advice. While gold has many interesting features – it is ancient, it is indestructible, mystical and it glitters alluringly – it is not a reliable savings product.
Like all commodities, gold can rise and fall in value, dependent on supply and demand, meaning if things are bought intensely while production struggles to keep up, prices will rise or fall once production overshoots demand.
But this is not the whole truth about gold. If you ignore dentists for once, there is no real industrial use for gold. It is not ‘consumed’. No matter how much or little of it is mined, it never vanishes. All gold ever dug out or looted in the Americas is still in existence – in bank vaults, safe lockers, in family jewellery and church treasuries.
Today the biggest hoarders of gold are central banks and ‘exchange traded funds’ – investment vehicles buying physical gold and then selling easily tradable participation papers to investors. Shortage can only happen when they decide to buy much of it unexpectedly. The opposite happens when they decide to sell in a rush. Such moves in sentiment are driven by rather irrational motivations, not by producers or consumers.
I don’t want to say holding gold has no merits whatsoever. If you are afraid that your currency will be debased because your government decided to print money for State expenditure or wishes to abolish cash altogether, or loses monetary control in a war or a cyber wipe-out, the preservation of wealth in a payment instrument that is accepted across cultures for millennia may be sensible. Yet be aware that in times of need the price of a leaf of bread may exceed the value of a gold bar.
All gold ever dug out or looted in the Americas is still in existence – in bank vaults, safe lockers, in family jewellery and church treasuries
As an ‘investment’ product, gold has very little value. It pays no dividend and has no predictable upside: adjusted for inflation, gold costs the same today as 40 years ago, with nominal price swings from $250 in the 1990s to $1,800 in late 2011, when investors were scared to bits by ‘unorthodox’ central bank policies trying (and failing) to boost inflation by ‘printing’. Today, gold’s daily price fix in London hovers around $1,200 (where ‘price fixing’ had acquired a darker meaning in the years after the financial crisis, like exchange rate ‘fixing’).
To compensate for the fact that gold does not pay interest and therefore will lose in value when interest rates go up, everything else staying equal, many investment advisors propagate gold mining stocks as a proxy for gold, which has the advantage that dividends are paid to shareholders – if there are any profits to be distributed, that is.
The crux in this is that mining costs, other than the price of gold, have relentlessly climbed over the years. To mine an ounce of gold will cost in average $600, no matter how the gold price fares – a far cry from the times when gold diggers were still making money when the gold price was in the lows of $300. So gold-stock investors are pummelled by falling gold prices but not necessarily supported when they rise.
The value of an enterprise depends much more on good management than the price of its product alone, so investors could see to their dismay that while prices are up this may not automatically relate to the value of their mining title. Gold miners and gold do not necessarily move in tandem.
Against better knowledge I followed the investment advice given to me by this banker more than 20 years ago. His investment rationale was based on the increasing wealth of the Indian middle classes, traditional buyers of gold for wedding jewellery. “They will be the buyers of the future,” he was convinced.
His argument was, of course, quite bonkers, as the Indian government soon found means to prevent capital flight for unproductive gold purchases, and the aspiring middle classes bought cars and apartments rather than gold for their wedding dowry.
I paid little more that $280 per ounce at the time, and thought it highly unlikely that gold would ever get much cheaper. I may not win, I said to myself, but shouldn’t lose too much either. My main concern was inflation at the time, a concern as irrational today as the investment case for gold. But then, who knows? When prices dropped more than a third over the past few years I was not overly concerned. My paper gains were still considerable.
A good investment? I am still undecided whether to sell it or to keep it. This is the thing with us humans. We may spot a good buying opportunity but we will always struggle to know when it is the best time to sell...
Andreas Weitzer is an independent journalist based in Malta. He reports on the economy, politics and finance. Please send in any queries, concerns or ideas that you would like him to discuss in his fortnightly column to: editor@timesofmalta.com – Subject: Sunday Personal Finance.