5 Reasons to Join the Gold Rush

June 21, 2009

1. Lack of Intrinsic Value: I disagree. Gold does have industrial uses due to its remarkable ductability and resistance to oxidation. But it is the scarcity of gold that gives it value. Gold has been an unparalleled store of value throughout history.

2. Concentrated Ownership: To paraphrase Vitaliy, "GLD, the gold ETF, is the sixth largest holder in the world." I disagree: GLD serves as an intermediary, and the ultimate holders are individuals and institutions. The existence of an ETF may encourage speculation, but I do not view the ETF as a form of concentrated ownership.

3. Alternative Inflation Hedges: Vitaliy has a point here: The existence of TIPS, WIPS, and commodity baskets diminishes the value of GLD as "the only game in town" to hedge inflation.

4. Decline in Gold Prices: Vitaliy claims that a decline in gold prices would undermine the perceived value of gold. I agree, but I must respectfully dismiss this as a circular argument.

5. 200 Years of Returns: I will concede this point, which is the best reason for not owning gold. Commodities are a means to an end, not an end in themselves. They do not naturally generate investment returns as public companies do. If profits lag, shareholders can push for a restructuring or a change in management. Commodities, on the other hand, are merely costs in the capitalist equation, making them vulnerable to substitution, reduction, or elimination.

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