Investing in Gold: The Bears vs Bulls Debate

There is no fiercer debate in financial blogs than Investing in Gold, pinning the Gold Bulls versus the Gold Bears. Here we look at their respective positions on this precious metal.

 

Investing in Gold: The Bulls

The Bulls buy gold because it has been used as a store of wealth and medium of exchange for thousands of years. Archaeological evidence of this goes back to 40,000 BC. Its value stems from the scarcity of the yellow metal which remains difficult to find and mine despite all the technological advances in mining. So, any increase in the production of gold remains limited.

This contrasts with fiat currencies, all of which have disappeared sooner or later. Fiat money is created by a sovereign nation state to be used as legal tender in that country. But the intrinsic value of fiat currency is nil. The central bank can theoretically print as many bank notes as it wishes without limit. Since money is now digital this is even easier and comes at zero cost.

Trillions of dollars have been created by the US Federal Reserve since March 2020 to offset the impact of the Covid-19 epidemic and salvage the world’s financial system. All other central banks are printing money too on a scale never previously imagined. This will inevitably devalue these currencies.

Interest rates have also been lowered to zero and are even negative in many countries, so investors are being penalised for keeping cash in the bank. If you factor in the negative impact of inflation on the purchasing power of fiat currencies, then gold looks a much better alternative store of wealth.

Central banks have continued to add gold to their reserves in order to diversify away from the US dollar and in most cultures the shiny yellow metal is still prized today for social status in the form of jewellery.

 

Investing in Gold: The Bears

The bears would not buy gold even with surplus cash because they believe gold is a relic from our barbarian past. It has no real use nor value, except for its perceived value in jewellery.

Gold does not compete with the US dollar as the safest store of value during times of stress. This is why big pension funds do not allocate more than a minute fraction of their investments to gold.

Gold is not as liquid as cash and incurs storage costs. Furthermore, gold does not earn you anything.

The price of gold has been fluctuating substantially and did go down along with other metals and commodities during the last intense liquidity crisis observed in March 2020.

Finally, if one really thinks that Covid 19 or future world events will presage the end of civilisation as we know it, what will one do with their gold? It cannot be broken down easily, nor transported, nor is it edible. Additionally, how will someone protect their gold bars? Instead, if someone wants to survive the ‘end of the world’, they should be buying livestock, plants and food stuff; then go and hide in a remote location.

 

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