If you call gold a “weird asset class”, as I did, you’re bound to receive a ton of angry emails and comments. Gold is kind of like a religion, you either believe in it or you don’t. Nonbelievers are calm and rational for the most part. The believers are “a bit nutty”, as James Montier put it. They all recite identical arguments, using the same choice of words, in the similar order as they were scripted. In fact their arguments do sound very much like gold commercials that run all day long on CNBC and radio. Vitaliy Katsenelson

It must be admitted that Vitaliy's bearish argument, one which has been made on this site repeatedly since 2001, will eventually prevail. In the meantime measure it against the performance of any other asset class in that same time frame and you'll find the results are, indeed, a "bit nutty." For everything there is a season.





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8 Comments so far

  1. Vitality N. Katsenelson on April 21, 2009 10:10 am

    If you call gold a “weird asset class”, as I did, you’re bound to receive a ton of angry emails and comments. Gold is kind of like a religion, you either believe in it or you don’t. Nonbelievers are calm and rational for the most part. The believers are “a bit nutty”, as James Montier put it. They all recite identical arguments, using the same choice of words, in the similar order as they were scripted. In fact their arguments do sound very much like gold commercials that run all day long on CNBC and radio.

  2. Kevin Bryant on April 21, 2009 10:16 am

    I understand your point, though weirdness is often just a matter of perspective. what's weirder, holding a gold metal that, primarily for reasons of appearance and rarity, has had long historical value or a relatively young paper currency (the dollar) whose value is determined by other relatively young paper currencies? we view economic history through the lens of 100 years, maybe 200 years, and ignore the fact that the span of economic and monetary history is epochal and has seen the rise and fall of countless currencies. the mind boggles when reviewing the frequency of currencies crises over the last 200 years alone. the fact that central banks continue to hold meaningful gold stores and that a gold backed currency has reemerged as a point of serious discussion for some (Russia for instance) suggests that its monetary value remains relevant during unstable times. this is not to suggest that gold is going through $5,000 an ounce but i also wouldn't call people like Barton Biggs, George Soros, Marc Faber, Jim Rogers, you get the idea, as irrational or "nutty". they have all at varying times acknowledged the merits of gold ownership. coming from a different angle, we evaluate the fundamentals of an automotive company. we may come to an estimate of value starting with their ability to increase sales. car purchases are, as we know, largely driven by completely superficial factors, appearance, styling, acceleration (beyond some minimum quotient), top speed, etc. of course, a particular car brand might appear to have more utility than an ounce of gold, the cars value and therefore, the company's value is no more fundamental than the value of gold. it is largely determined by the capricious whims of the general public. ultimately, we take comfort in the notion of value because of history, i.e., the car company's ability to generate revenue growth (or not) over an extended period of time. when you get right down to it, any company that doesn't satisfy one's basic needs, food, clothing, shelter, is dealing in the irrational world of personal preferences, wants and desires. all we have are historical patterns of behavior to glean the stability of trends and value. i don't believe in this notion of intrinsic value, or at least it's not particularly useful to me as a concept. gold has value according to centuries of price history. that value has ebbed and flowed according to monetary circumstances and geopolitics. hope this hasn't sounded just like one of those CNBC commercials…

  3. Yishen Kuik on April 21, 2009 10:26 am

    There is certainly a historical inertia argument for gold as money. But I would argue that the reason for that historical use to begin with is that precious metal is ideal money

    Because barter is inefficient, requiring a "double coincidence of wants", money is superior. And something must be money. Early history ushered in a plethora of moneys - stones, shells, clay tablets, animal teeth etc …. all candidates for money, but evolution slowly pushed all inferior forms of money into museums, leaving the only superior candidate for money in pre-modern times : precious metals.

    Lets come up with a list of what an ideal money should be:

    1) Good money must be hard to duplicate at a cheaper cost than its notional value An economy running on clay tablets will never have a $500 clay tablet because you can duplicate a clay tablet for less than $500 (ie a clay table that can be exchanged for a basket of goods that we today would agree to be worth $500, like say 20lb of dry aged NY strip sirloin). The raw material of mud is too plentiful to support a high denomination, and the convenience of money is proportional to it's ability to support high denomination. Lugging around a few tons of clay tablets to buy a house is silly. Money that is restricted in supply can have great density of value, and density of value makes for convenient money. Convenient money is superior to inconvenient money.

    2) Good money must be durable - ie physically and chemically inert. Money that eventually rots is clearly inferior to money that does not.

    3) Good money must be divisible If we have big sharks teeth as $1 and small sharks teeth as 50 cents, this ratio of 2 small sharks teeth to 1 big sharks teeth will not hold, because the exchange ratio is ultimately going to be affected by the actual supply of small sharks teeth to big sharks teeth in the real world. One cannot set exchange ratios by diktat - it occurs by natural supply and demand. Hence money that is divisible is ideal. If sand was money for instance, we could measure it out perfectly for smaller transactions. If money was giant mill stones on the island of Yap, it might be hard to handle a wide range of transactions because that money is not perfectly divisble. Money that can support a wide range of denominations is superior money.

    4) Good money must be difficult to counterfeit Related to 1). If carved elephant tusk bits were money, it might be counterfeited with carved walrus tusk bits. Not everyone can tell elephant and walrus tusk apart - ie it's costly to detect. High cost of detection = high incidence of fraud. High incidence of fraud = distrust of the money. Therefore money easily identifiable as bona fide is superior money.

    Lets look at gold.

    1) There is a fixed supply of Gold in the world ensuring it's rarity. Human beings are at present unable to create gold.

    2) Gold is chemically inert. A gold coin at the bottom of the ocean will be shiny and intact one million years from now.

    3) Gold is extremely ductile and can be recast into smaller or bigger bits easily. You can do it at home with an acetylene torch and tongs

    4) Atomic number 79 is denser than most other naturally occuring elements. Unless you have access to fusion, it is impossible to fake density - ie for every given cubic volume you cannot create material that equals the mass of gold. ie a simple scale is all you need to detect fraud. Recall Archimedes's eureka moment.

    In the event that you do get your hands on some titanium [YK: sorry I meant Platinum], which is almost as dense as gold, you might fool the naked eye and a primitive scale. However Titanium [YK: ooops, what was I thinking, I meant Platinum] is also one of the hardest substances on earth whereas gold is soft, so a quick bite of the coin would expose your fake. Hence all the fraud detection one needs for gold are genuine gold for comparison, a pair of molars and a primitive balance. Not much IQ or training necessary.

    Hence I would argue that there are fundamental reasons why precious metals persists as money. They have special chemical and physical properties that make them ideal candidates.

  4. Kevin Depew on April 21, 2009 10:31 am

    I own a very small amount of physical gold and silver. Very small. In fact, it's small enough that I can easily stuff all of it into a pillow case and easily carry it down to the East River along with the inflatable life raft I bought (for a little less than one ounce of gold, although, admittedly, the place I purchased it from refused to accept anything but US dollars when I bought it… and actually, now that I think about it, they wouldn't really accept actual paper dollars but demanded instead that the whole transaction occur with a credit card).

    The gold I own is small, but still fairly heavy, so anyone who tries to stop me and steal my life raft, or my gold, will be very surprised when I give them a vicious taste of this gold-filled pillow case. Unless they have a gun and shoot first, but look, we can't control everything. Sometimes a little luck has to go our way.

    What would be the worst case scenario is for someone to steal my life raft at gunpoint, leaving me with nothing but a pillow case full of gold, because under the circumstances where I would be racing to the East River to launch my life raft while carrying my gold in a pillow case in the first place, the gold would be pretty much useless without a life raft. I said useless, not worthless. In my experience worth and use are like two children from the same father who have never met and will likely only ever meet by pure chance and without recognition.

    So today I can sell my physical gold at a fairly harsh discount to any number of places within walking distance of where I sit, but the thing is I don't need to sell it. Not right now. Which, of course, is where the life raft comes in, and in a strangely circular fashion raises the question of why I have any gold in the first place, other than to look at it I mean. Just about every scenario I can think of where gold is useful - for purposes other than admiring it - also requires a life raft. Just about every scenario I can think of where gold has great worth means anything I else I own has little if any, but hey, at least I have a pillow case full of gold.

  5. ld on April 21, 2009 12:23 pm

    Excellent comments but especially enjoyed reading Kevin Depew’s comment. When it comes to gold, people either get it or they don’t. I hope gold is of limited value and we don’t ever need any life rafts, canned goods or rifles.

  6. Adam Nelson on April 22, 2009 8:22 am

    I liked the physical description of gold, but titanium is very, very low dense (for a metal). You were probably looking for tungsten which has similar density and is very hard.

  7. Russell Sears on April 22, 2009 6:12 pm

    What most of the fervent believers of gold miss, is what gave gold its real value was its ability to pay taxes. This kept the government from taking everything you trully valued. Changing to paper currency, backed by gold, and then simply taking the gold backing away in fiat currency, does little to change this. However, as my maternal Grandmother's side would remind me occasionally when talking of fleeing the communist at the start of WWI, the reason gold is good for a "doomsday scenario" is that those able coerce a tax out of the public will change. With paper money as the basis for taxes, the real value of money is more directly seen as the value of the individual generating the wealth. Hence, collecting the optimal wealth is a matter of "helping" (not hindering) the most productive in society create more wealth. Rather than simply raising tax rates, from Government's perspective, it becomes how do you create the most taxable wealth? Elevate individual's freedom. Ultimately, the stability in the system of fiat money, is the stability of the individual's worth within the system. In a doomsday/war scenario, the individual has little worth. But in chaos, gold has little value until some stablization of government and with it some stability in individual worth, exist. Gold and currency trading takes on broader philosophical meaning with this foundation. Russ

  8. Finn on December 30, 2010 1:49 pm

    Sure as hell glad I didn’t take the “bearish” advice since 2001.


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