Gold's a Poor Doomsday Investment

Gold is physically ideal for the job of making coins by hand. Its chemistry, and not some mysterious source of value, is why man used it for money through much of recorded history. On its own, gold is both a poor investment and poor protection against a rapid rise in consumer prices. Investors who foresee a financial doomsday for America or the world -- I’m not one of them -- should hoard something else.

Suppose money standards aren’t yet common and you wish to create one. You need a durable good. Corn rots and iron rusts. Gold is too picky an element to mingle with oxygen, and so doesn’t corrode. You want your money to be divisible, which lets you carry a little to the shop and leave the rest in a safe place. Gold is divisible. And if you’ve decided on metal, an easily shapable one is nice, so that instead of carrying ugly lumps around you can stamp a king’s face on a coin. Gold is so malleable you can pound it to see-through thinness. Of course, insignias can be faked, so your money should be made of something that’s easy to test for purity. Gold isn’t magnetic, it dents when you bite it and it withstands acids that eat everything around it.

You need only a few more attributes. Your metal money should be easy enough to mine but also relatively scarce. A stable supply, after all, will keep small amounts of the stuff valuable. Gold is exceedingly rare. All of it ever mined weighs two-thirds as much as the Statue of Liberty, who without her pedestal is daintier than you might think. Finally, your money shouldn’t be too useful. That is, citizens should feel free to shape it into jewelry and trinkets, but you don’t want them eating or burning the stuff, because that would fiddle with supply. Unlike valuable oil, gold is rarely consumed.

No country today uses gold for money, or even as the basis for paper money. They stopped using it over the past century largely because commodity money was deemed too rigid to deal with sharp economic slowdowns, when policy makers view creating extra money to spur commerce as less risky than nonaction. (I’ll leave the pros and cons of fiat money, as we call money backed only by government say-so, as a subject for another day.)

Ask yourself, then: What makes gold valuable today? Fashion does, for one, but tastes change. A trivial example: Three years ago I read a New York Times story on how star architects were using silver-colored faucets to replace gold-colored ones in posh buildings because the latter were suddenly believed to signify “no class.”

Gold is still scarce, but rarity without demand says little about price. Iridium, a member of the platinum family, is four times as rare as gold on earth, but today fetches half gold’s price.

Industry still uses gold, but not much. Gold’s corrosion resistance made it handy for dental amalgams for a while, but porcelain has taken its place. Manufacturers sometimes use a minute amount of gold to plate high-end electrical connectors, even though copper is a better conductor of electricity, because copper, to call on green Lady Liberty again, oxidizes. But I find it difficult to believe that when our promised financial Armageddon strikes, we’ll clamor for better stereo cables. No, gold investors overstate the metal’s industrial value. Its relative uselessness, recall, is part of what made it ideal for money.

Gold is valuable today simply because many people want to own it. Some think it will make them rich, perhaps because of gold’s historical connection to wealth. But that is wrongheaded. Gold doesn’t work to make itself more valuable. It just sits. According to Wharton professor Jeremy Siegel, a dollar invested in gold in 1802 was worth $1.62 by 2005. Treasury bills during that time turned a dollar into $293 and stocks turned it into more than $666,000. Since 2005, gold has run up and stocks have plunged, but that has merely put the result closer, not close: something like $2.80 for gold and $420,000 for stocks.

Some think gold is just the thing for protecting against inflation, but this is wrong, too. Inflation is a gradual rise in the prices of ordinary goods. The best way to protect against ordinary goods becoming less affordable is to own them. Gold is a poor representative of ordinary goods. A small part of its price movement reflects its practical use. Most of it comes from frenzied speculation and hoarding. Infomercials and exchange-traded funds have made it easier than ever for ordinary savers to buy in.

Gold’s price could easily double in a year or sink by half. I’ve no idea which to bet on, but gold is unlikely 20 years from now to have made those sitting on it much richer. Coin-shapers contracted by governments are having trouble keeping up with demand at the moment. Be cautious about stashing too much wealth in something so fickle, especially when it’s popular.

Own those ordinary goods instead. Even better: Own the means of producing them.

Warren Buffett explained it recently in a television interview, while surrounded by furniture, candy and soda made by companies he owns or invests in. When inflation hits, the best thing to have is talent, because if you’re the best at making or doing something, people will always exchange their labor or resources for what you’re selling, and it doesn’t matter if the unit of exchange at the time is shark teeth. Buffett joked that he has a shortage of talent. The truth is that he has an abundance of money. I hope you do, too. If it’s more than what you need to live for the next couple of years, safeguard a large portion of it in other people’s talent by buying businesses, or shares of them. Index funds will do nicely. For individual stocks, I recently offered suggestions here, here and here.