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WEEKLY ROUNDUP
Hello, Reader.
Buying scarcity is usually a good idea.
Scarcity is the “active ingredient” of timeless investments like beachfront properties, mint-condition rare coins, and limited-production luxury automobiles.
It is also the attribute that gives precious metals their sparkle, enabling them to preserve purchasing power throughout good times and bad.
Nevertheless, precious-metals “haters” are legion. They dismiss these shiny metals as investment has-beens that retain no real value or purpose in the modern world.
For instance, 20 years ago a financial writer named James Surowiecki scorned gold as “a testament to the tenacity of popular delusion.”
It is valuable, he said, “only as long as we collectively agree that it is… just because it has a long history of being used as money doesn’t mean that it has a future.”
He then broke out his thesaurus and condemned gold’s allure as “increasingly atavistic.”
Although I consider Surowiecki’s perspective to be as valid and timeless as gold itself, I do not share it. Instead, I would submit that buying gold reflects far less atavism than uncritically trusting paper assets, like the U.S. dollar or Treasury bonds.
According to my dusty, unabridged dictionary, “atavistic” refers to any trait produced by the “reappearance of a characteristic in an organism after several generations of absence, usually caused by the chance recombination of genes… also called a throwback.”
In other words, the impulse to buy gold, according to Surowiecki, is a kind of congenital oddity, like a “vestigial tail.” That is, the impulse to buy gold sporadically reappears, even though the rationale for doing so has long since vanished.
Unlike a precious metal, a U.S. dollar contains no measurable quantity of any element on the periodic table, nor any resource whatsoever that could contribute to any industrial application. Furthermore, a U.S. dollar is a poor conductor of electricity and combusts near an open flame.
In other words, a dollar possesses no intrinsic value.
We value them simply because we have for centuries. To borrow from Surowiecki, the dollar will remain valuable “only as long as we collectively agree that it is… just because it has a long history of being used as money doesn’t mean that it has a future.” By extension, the appeal of dollar-denominated assets like Treasury bonds seems “increasingly atavistic.”
Relative to paper assets like T-bonds, gold has become increasingly scarce. To illustrate, let’s take a look back at history…
Back in 1979, when the federal debt first crossed the $1 trillion mark, the current market value of our gold reserves was about $150 billion. In other words, our total debt was about seven times larger than our gold reserves. Fast-forward to today and our $34.7 trillion federal debt has become 52 times larger than the value of our gold reserves.
Interestingly, since the day Surowiecki penned his critique of gold 20 years ago, the value of sterile, zero-yielding gold has soared more than 400%. By contrast – as you can see in our “Chart of the Week” below – long-term Treasury bonds (as represented by the iShares 20+ Year Treasury Bond ETF (TLT)) produced a gain of just 93% over the same time frame.
 
In other words, the relic asset outperformed dollar-based T-bonds by a factor of 4-to-1. This “bad math” may not matter to folks like Surowiecki, but it might matter a lot to folks like you and me.
To be clear, we mostly focus here on identifying great businesses with superior growth potential. Gold is not one of those, and neither is silver or platinum.
Therefore, I do not recommend “loading the boat” with precious metals. But I do recommend buying them as a hedge against potential dollar weakness or other unforeseen financial trauma. In other words, I recommend buying scarcity, at least as a hedge.
For deeper insights on managing precious metals in your portfolio, learn how to join us at Fry’s Investment Report.
And for a closer look at what else we covered here at Smart Money in the past week, read on… |
