Down on Gold

Dave gives a description of the two things that make gold seem like a good investment when it's not.

QUESTION: Chris in Georgia wants to know about owning gold, and what is the best way to buy or sell it. Dave tells why he is not a believer of precious metals being an investment.

Dave's ANSWER: I don’t own any gold except for some cufflinks and a watch. I’m not a believer of precious metals as an investment. It’s a commodity, which translated means it creates no revenue. I invest in things that create revenue.

Bricks don’t create revenue, so I don’t buy bricks. I don’t buy cloth. I don’t buy commodities, and I don’t buy little gold or silver bricks either. The point is that the only thing which drives the market price of gold is demand. The only things that drive demand for gold are greed or fear.

People feel like the price is going to go up, so they jump in. Greed might be too strong a word, so it might be speculation. You are estimating people’s emotions. That’s all that drives commodities because gold does not create revenue. The only way gold goes up in value is if more people want it. If less people want it, it goes down.

So many people want it right now because they are afraid of the way Washington is running things. Things like increasing deficits and fiscal cliffs ... That fear of Washington’s misbehavior hurting our economy almost irreparably is what is driving the price of gold more than anything. The more in-depth the fear is, the more intense people are about buying gold.

Some are just vaguely fearful and say that things aren’t good, which I would agree with. Based on that, they see gold as an investment because they think there is going to be more fear before there is less fear. They bet on the fear driving the price up. Others have gone all the way to the conspiracy theory side. They say the world is coming to an end and it’s all the Rockefeller’s fault or whatever junk they dream up. They have bottled water and generators and all that in their basement. They think the world is coming to an end, and that’s a bunch of bull.

Are there some reasons to be afraid? Yes. That’s been driving the gold market for the last 10 years. Gold has done very well during that time. But it hasn’t done very well because gold has intrinsic value. It’s done very well because people are afraid.

Some people are also speculating in gold, which would be on the greed side, or the profit motivation side. It’s fine to speculate in things if you want to, but I don’t like markets where the result is based on the quality of something that is not going on. I’ve bought diamonds for years to sprinkle them on my wife. The idea that a diamond is an investment or a girl’s best friend is bull.

I have bought them for 20 years and haven’t seen them go up in value. If you want to see a return of 8% or 15%, it doesn’t happen. It’s a commodity, and it’s based on demand. The saying that diamonds are a girl’s best friend is not an investment analysis, it’s an advertising prank. The idea was that if a girl has diamonds, that means she has a relationship. It started out that way because ladies were not allowed to own anything in a pre-equality society, so they moved toward that.

The gold thing is driven by fear, versus if I buy a piece of real estate. If I buy a $300,000 rental house, it will make me a certain number of dollars in rent. I have the rent, which I can analyze and say that if I do my job as a landlord and fill up the property, then that investment will create revenue. It’s not a brick. It creates revenue and it has the future to create revenue. It can also go up in value in addition to that.

If I buy mutual funds, which have stocks in them, that creates revenue. If you do an analysis of Apple or Hewlett-Packard or Dell or McDonald’s or Home Depot, where you can analyze the level of debt they have, the growth level they have, their store sales, profit-earnings ratio, you can look at those numbers and determine that the stock is going to go up and be worth more. It is predictable based on the math. It is not based on someone’s whim.

Yes, on someone’s whim, that company could be mismanaged, but it’s pretty safe to say that Apple will be all right for a while. I buy in good growth stock companies in good growth stock mutual funds. But that’s an analysis of numbers; I’m not buying a brick, I’m buying cash. I put cash out and I get cash back.

In this case, you put cash out and you own a brick. Then you wait to see if fear drives the price of the brick up. The instant there is less fear, the price of the brick will come down. Gold, prior to 10 years ago, has a horrible track record. Here’s another hint: If your investments are advertised right after a Snuggie ad, you are probably not in a good category of investments.

If Snuggie is on, and then right after that, catheters and then gold coins, something is wrong. Some people might say that real estate is on there, but it’s get-rich-quick real estate, which I don’t advocate at all. But owning real estate does make sense.