gold coinCriticism: Billionaire investor Warren Buffett said he avoids gold because “gold itself doesn’t produce anything.”
Response: Buffett’s comment may be incorrectly interpreted by some as being completely anti-gold. Actually, he was implying that gold doesn’t produce anything the way businesses generate goods or services or cash flow. He’s wrong. Gold certainly does produce jobs for the mining and jewelry businesses, and gold is a critical component in some manufacturing. Even if you think Buffett’s “doesn’t produce anything” comment is an anti-gold investment criticism, consider this: gold has risen nearly six-fold in a decade compared to a roughly 75% rise in shares of Buffet’s holding company, Berkshire Hathaway. Gold has actually produced monumental gains for investors.
Criticism: If gold is such a good investment, why are people being encouraged to cash in their gold by a variety of cash for gold operations?
Response: Cash for gold operations have received greater exposure as the price of gold has rallied. Late comers to this industry, in particular those who set up temporary shops, prey on the emotions of people who may need to sell hard assets to rectify a weak financial position, or who are fearful of losing what are perceived as hard fought gains in their gold holdings. Still others may be prematurely selling their gold because they don’t completely understand why there has been an on-going gold bull market.
Criticism: Isn’t it hypocritical for gold dealers to transact gold sales based on an exchange of fiat cash for gold?
Response: Cash, or dollars, are society’s primary means of exchange. Unless such critics are advocating that society turns to a barter system (which in many ways would be worse than sagging fiat dollars), exchanging gold for dollars is a function of how the overall modern day financial system works.
Criticism: Gold drops when the U.S. dollar is strong.
Response: This can be true from a short term, rumor-of-the-day perspective; however, the long-term trend for the dollar has been a precipitous decline while gold has been in the midst of a decade-long bull market.
Criticism: Since 1975, when Americans again were legally allowed to own such things as gold bullion coins, the Dow Jones Industrial Average has generated a greater return on investment than gold.
Response: That is a statistically invalid, apples-to-oranges comparison. A one-ounce gold coin doesn’t change; it remains one ounce of gold. But the composition of the Dow as a managed stock index has changed over two dozen times since 1975. Companies that declined in profitability or went out of business were deliberately replaced by other publicly traded firms. Any long-term comparison between the price of gold to the repeatedly changed components of the Dow is misleading and worthless.
Criticism: Gold is a risky investment.
Response: And the stock market isn’t a risky investment? The price of gold may go up or down, but gold bullion coins are not subject to defaults, liquidity problems or the kinds of risks that have devastated some areas of the equities and real estate markets since the financial crisis started in 2008.
Criticism: Gold doesn’t pay dividends.
Response: Neither do some of the best known companies, including Apple and Google. Owning physical gold has proven to be a long-term way to preserve wealth and avoid the kinds of risks associated with even dividend-paying investments. The absence of a dividend is more than made up by gold’s outstanding relative performance the past decade.
Criticism: Gold is a “bubble” asset or the price of gold is a bubble about to burst.
Response: According to the World Gold Council, “gold holdings by private investors have increased 24% in a decade, but gold remains an under-owned asset making up only 1% of global financial assets in private hands.” So while gold critics base their “bubble” statements purely on gold’s price appreciation over the last decade, actual physical gold in bullion and coin form is held by a relatively small few in the investment world. By this statistic, the gold market is not in the midst of a mania where ‘everyone’ is buying it and creating a bubble. But for gold critics who have been wrong for a decade, gold’s price appreciation and the volatility of the paper gold futures market has led them to propagate faulty conclusions about the state of the gold market.
Criticism: Gold is not a stable asset because it has traded in an 11% range between approximately $1,700 and $1,900 an ounce in recent months.
Response: Price fluctuations occur in various financial assets due to near-term economic and monetary conditions, but the overall trend for gold has been undeniably higher. Gold is up more than five-fold in a decade as a growing number of investors realize that gold can preserve wealth and reduce risk to a long-term portfolio in times of systemic risk. It is gold’s stability that enables it to act as a “cost-effective form of protection that does not negatively affect and sometimes benefits long-term expected returns, while reducing risk,” according to a World Gold Council study. Human history also begs to differ with gold critics. Gold has been recognized as a store of steady value for at least 6,000 years. Gold is not subject to the whims of industrial supply and demand trends since industrial demand only accounts for 3/10ths of a percent of a steady supply of 5 billion ounces in the world today (WGC data).
Criticism: Gold is not a good hedge against inflation.
Response: Comparisons of gold versus inflation usually peg gold at its intra-day high back in 1980. If you track gold versus inflation since 1975, when Americans were permitted to legally own gold bullion coins again, the ratio is much better. And, if you still insist on using 1980 or almost any year as a starting point, then compare the purchasing power of the U.S. dollar since then. It’s lost about three-fourths in the last quarter-century while gold has maintained its purchasing power. Gold has maintained its buying power over the last century. For example, in 1909 a new Model T Ford cost $440 — equivalent at the time to 22 circulating $20 denomination U.S. gold coins. Today, those same 22 gold pieces are worth over $35,000 — and that will still buy a nice, new automobile.
Criticism: Some Wall Street analysts say that gold exchange traded funds (ETFs) or gold stocks are better than owning physical gold bullion coins.
Response: It’s certainly better for the brokerages that trade in ETFs and individual stocks, and some of those analysts touting ETFs work for brokerages that buy and sell equities. An ETF is a paper asset and many people who are buying gold coins and ingots are doing so to diversify and have some non-paper investments. Gold is a centuries-old proven way to preserve wealth and have quick liquidity. Gold mining shares are attached to companies that must compete with other companies, are subject to labor disputes, financing issues and government regulations to cite just a few of the risks.
Criticism: It’s too costly to store gold bullion coins.
Response: The comparatively inexpensive fees for a bank safe deposit box can be itemized as an investment cost on your tax return.
Criticism: Some Wall Street analysts claim $1,700 an ounce is still too high for gold.
Response: Adjusted for inflation, the price of gold has not exceeded its 1980 record high. We’ve also sure seen in recent years how some Wall Street analysts and forecasters have been absolutely wrong in their predictions about gold as well as the stock market. Some so-called Wall Street experts claimed gold was at its peak when it was $600 or $700 an ounce. In the meantime, we’ve seen how the US dollar and other global paper currencies have been devalued relative to gold in recent years.