Because of my interest in monetary theory, I’m occasionally asked whether the precious metals are a “good investment.” It’s a question that can’t be answered with a simple yes or no, because it lacks context.
The required context is the answer to this question: “Where do you store value?”
I regard gold and silver as hedges. A hedge is a store of value: i.e., a medium in which to save what I’ve earned. I don’t expect gold or silver to increase in value. An investor seeks an increase in value. A speculator hopes to exploit near-term fluctuations in value.
Which brings us to the following, which I clipped from Kitco a few minutes ago:
An investor would look at that one-year 44.6% increase in the dollar price of gold and want to sell part of it, to preserve part of his “profit.” A speculator would look at the near-term 6.2% increase and would want to sell all of it. A hedger, such as myself, merely checks his dollar-denominated bank balance and asks himself “Can I afford to buy more right now?”
Because American productivity increases slowly, gold and silver slowly become more valuable in terms of what they can buy, per unit weight. But that slow increase would not ordinarily interest an investor. A speculator, of course, would only be interested in significant short-term fluctuations in the metals’ price in dollars. A hedger just keeps trading dollars for gold, shedding the risks associated with the former for the stability of the latter.
Even socialists appreciate the stability of the precious metals. Note that the rulers of socialist nations keep their ill-gotten gains in “hard currencies:” typically U.S. dollars or Swiss francs, because those currencies are more stable than other currencies. But they’re constrained by the awareness that should things “go to Hell,” they’ll need to flee quickly. Therefore, they can’t burden themselves unduly with a mass of precious metal. Fifty or sixty pounds of gold can really weigh down one’s “go bag.”
Hearken to the funniest of the socialists of yesteryear, the late George Bernard Shaw:
[T]he most important thing about money is to maintain its stability, so that a pound will buy as much a year hence or ten years hence or fifty years hence as today, and no more. With paper money this stability has to be maintained by the Government. With a gold currency it tends to maintain itself even when the natural supply of gold is increased by discoveries of new deposits, because of the curious fact that the demand for gold in the world is practically infinite. You have to choose (as a voter) between trusting to the natural stability of gold and the natural stability of the honesty and intelligence of the members of the Government. And, with due respect for these gentlemen, I advise you, as long as the Capitalist system lasts, to vote for gold.[From The Intelligent Woman’s Guide To Socialism And Capitalism]
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I have to wonder how much of the current cost of gold (as opposed to its worth/value) is as a commodity, and how much as a form of potential currency? Some form of independent “money” is needed for easing trade between different kinds of services and products. (An easy example is a carpenter trying to barter the trade of a set of cabinets to the grocer in exchange for meat and bread. The grocer almost certainly won’t need a new set of cabinets, so the carpenter would make them and sell those cabinets to a third party in exchange for that metal and paper “money”, which can be then traded to the grocer.) But Money also serves as a symbol of Value Received, which is ultimately a subjective assessment of “is that something I can afford?” (“Will I receive enough value from that product to make the effort of replenishing my money supply worth it?”)
Gold is most commonly used as a commodity – jewelry, industrial, electronic, fashion – but its rapid, minute-by-minute fluctuations would make it less viable for currency than the Zimbabwean or Wiemar Republic examples. Even if the dollar collapses entirely, something else that has both a general acceptability and ease of subdivision (how much gold dust and of what purity for a cup of coffee? A car?) will need to be used.