Authored by James G Rickards via the Daily Reckoning.
Is gold a commodity, an investment, or money?
The answer is…
Gold is a chameleon. It changes in response to the environment. At times, gold behaves like a commodity. The gold price tracks the ups and downs of commodity indices. At other times, gold is viewed as a safe haven investment. It competes with stocks and bonds for investor attention. And on occasion, gold assumes its role as the most stable long-term form of money the world has ever known.
A real chameleon changes color based on the background on which it rests. When sitting on a dark green leaf, the chameleon appears dark green to hide from predators. When the chameleon hops from the leaf to a tree trunk, it will change from green to brown to maintain its defenses.
Gold also changes its nature depending on the background.
Let’s first look at gold a commodity…
Gold does trade on commodity exchanges, and it tends to be included in commodity industries. The common understanding here is that gold is a commodity. But I don’t think that’s correct.
The reason is that because a commodity is a generic substance. It could be agricultural or a mineral or come from various sources, but it’s a substance that’s input into something else. Copper is a commodity, we use it for pipes. Lumber is a commodity, we use it for construction. Iron ore is a commodity, we use it for making steel.
Gold actually isn’t good for anything except money. People don’t dig up gold because they want to coat space helmets on astronauts or make ultra-thin wires. Gold is used for those purposes, but that’s a very small portion of its application.
So I don’t really think of gold as a commodity. But nevertheless we have to understand that it does sometimes trade like a commodity.
As far as being an investment, that’s probably gold’s most common usage.
People say, “I’m investing in gold,” or, “I’m putting part of my investment toward bullion gold.”
But I don’t really think of gold as an investment either. I understand that it’s priced in dollars, and its dollar value can go up. That will give you some return, but to me that’s more a function of the dollar than it is a function of gold.
In other words, if the dollar gets weaker, sure the dollar price of gold is going to go up. If the dollar gets stronger, then the dollar price of gold may go down.
So if you’re using the dollar as the measure of all things, then it looks like gold is going up or down. But I think of gold by weight. An ounce of gold is an ounce of gold. If I have an ounce of gold today, and I put it in a drawer, and I come back a year from now and take it out, I still have an ounce of gold. In other words it didn’t go up or down.
The dollar price may have changed, but to me that’s the function of the dollar, not a function of gold. So again, I don’t really think of it as an investment.
One of the criticisms of gold is that it has no yield. You hear it from Warren Buffet, you hear it from others, and that’s true. But gold is not supposed to have a yield because it’s money. Just reach into your wallet or your purse and pull out a dollar bill and hold it up in front of you, and ask yourself what’s the yield? There is no yield. The dollar bill doesn’t have any yield. It’s just a dollar bill, the way a gold coin is a gold coin.
If you want yield, you have to take some risks. You can put that dollar in the bank, and the bank might pay you a little bit of interest, but now it’s not money anymore. People think of their money in a bank deposit as money, but it really isn’t money. It’s an unsecured liability of an occasionally insolvent financial institution.
The risk may be low, but there’s some risk, and that’s why you get a return.
Of course, you can take more risk in the stock market or the bonds market and get higher returns (or losses, as the stock market is currently proving). The point is, to get a return you have to take risk. Gold doesn’t have any risk. It’s just gold, and it doesn’t have any return. But again, it’s not supposed to.
Gold’s role as money is difficult for investors to grasp because gold hasn’t been used as money for decades.
But gold in recent years has been behaving more like money than a commodity or investment. It is competing with central bank fiat money for asset allocations by global investors.
That’s a big deal because it shows that citizens around the world are starting to lose confidence in other forms of money such as dollars, yuan, yen, euros and sterling.
When you understand that gold is money, and competes with other forms of money in a jumble of cross-rates with no anchor, you’ll know why the monetary system is going wobbly.
It’s important to take off your dollar blinders to see that the dollar is just one form of money. And not necessarily the best for all investors in all circumstances. Gold is a strong competitor in the horse race among various forms of money.
Despite the recent price action, which is far more a function of the stock market rather than gold itself, this is great news for those with price exposure to gold. The price of gold in many currencies has been going up as confidence in those other currencies goes down. Confidence in currencies is dropping because investors are losing confidence in the central banks that print them.
For the first time since 2008, it looks like central banks are losing control of the global financial system. Gold does not have a central bank. Gold always inspires confidence because it is scarce, tested by time and has no credit risk.
Lost confidence in fiat money starts slowly then builds rapidly to a crescendo. The end result is panic buying of gold and a price super-spike.
We saw this behavior in the late 1970s. Gold moved from $35 per ounce in August 1971 to $800 per ounce in January 1980.
That’s a 2,200% gain in less than nine years.
We’re in the early stages of a similar super-spike that could take gold to $10,000 per ounce or higher. When that happens there will be one important difference between the new super-spike and what happened in 1980.
Back then, you could buy gold at $100, $200, or $500 per ounce and enjoy the ride. In the new super-spike, you may not be able to get any gold at all. You’ll be watching the price go up on TV, but unable to buy any for yourself.
Gold will be in such short supply that only the central banks, giant hedge funds and billionaires will be able to get their hands on any. The mint and your local dealer will be sold out. That physical scarcity will make the price super-spike even more extreme than in 1980.
The time to buy gold is now, before the price spikes and before supplies dry up. The current price decline gives you an ideal opportunity to buy gold at a bargain basement price. It won’t last long.
for The Daily Reckoning