Gold, the Pet Rock that Could

Gold has been called a “pet rock” by more than a few economists. As someone wisely said, gold is dug up from the ground and then usually people put it right back into the ground again, witness all the bank vaults and the famed gold deposits in Fort Knox, USA. Gold has a few problems with it, but late last year I had an urgent use for funds for a real estate investment and I truly appreciated the value of having some gold. I had invested in a unit and I needed to get it funded and close all the contracts and paperwork. Well, I had planned a decent chunk of cash for the closing costs, but I didn’t anticipate property in London cost so much in various lawyer fees, let alone the furnishing and other finishing touches. Long story short, I was about $15K USD short and I needed the money in 2 days. Luckily I had some gold in the house and I sold them via a bullion broker. Both the property investment experience and the bullion selling experience should probably receive their own stories later. But at the end of the day, I sold the gold and the money was in my account in literally 2 minutes. So now, let’s look at the pros and cons of owning physical gold.

Cons:

Storage costs. Gold does have a storage cost, however minimal it might be.

No dividend: Gold also does not generate dividend, so in the long run it tend not to out perform stocks or properties.

Pros:

Not fiat money. As readers know, modern currencies are fiat money and are backed by the trust in the issuing authorities. Hence USD tends to be widely accepted and Zimbabwean money, well, not so accepted and not so valuable. But we have to agree that the post QE 1, 2, 3 world that we are living in is fundamentally different than the one pre – GFC, and fiat money has its own issues. Gold at least is tangible and is limited in the amount of the physical stuff that exists. You may or may not think this is a big deal but evidently enough people care about gold.

Historical relevancy: Gold has been money for at least 5,000 years. Anywhere you go in the world, there is a place where gold can be converted into money.

Not affected by negative interest rate: As we have seen in Europe and Japan, as capitalist societies go through stagnation, one of the last resort weapons that central bankers use is to make interest rates negative. This will make gold look more attractive.

As for me personally, I like gold’s liquidity and anonymity, but I don’t see gold generating income or dividend. Fundamentally I like income generating assets, so I am going to hold maybe 5% – 10% of my total portfolio in gold, but no more. Gold to me is just a rainy day fund with a very small spread between buying and selling, so it’s good for that, but perhaps not much else.

Readers, have you bought gold as an investment, and if you have, have you had the need to use or liquidate it? Leave your comments below please.