The price of gold declined rather sharply over the past several days. The July 26, 2010 Wall Street Journal Commodities headline read “Gold Sinks as Market Worries Ebb.” Investors typically use gold and the common stocks of gold mining companies to hedge their portfolios against inflation and/or political risks. Political risk can take many shapes – coups, abrupt changes in fiscal or monetary policy, military acts of aggression, nationalization of private assets, etc. Another recent Wall Street Journal article, “Notable and Quotable” highlighted the explosion in demand for gold by noting that investment in the precious metal reached 617 tons in 2009 (versus 321 tons in 2008). Of this 2009 tally, nearly 230 tons were in the form of gold coins. During the past several months, the price of gold moved dramatically higher in the absence of near term inflation risks. It might be reasonable to conjecture the price rise was reflecting political risks.
We have two stinging observations as we think about this allocation to gold. The first: Gold, as an investment, is a dead end venture. It will not create wealth – it only preserves it. It does not help the economy grow. It competes for scarce capital and when an investor allocates to gold, they are NOT providing that same capital to an enterprise that might produce new goods/services and employ additional workers. The second: Gold, priced in dollars, reflects political risk (potential for government policy blunders). Connecting the dots, the Business Roundtable (an association of top corporate business executives that, according to a recent Washington Post article, have been “…President Obama’s closest ally in the business community…”) recently declared that government policies were creating sufficient uncertainties so as to preclude companies from making prosperity and job creating investments. We are monitoring the price of gold closely, trying to determine if the recent weakness represents a turning point signaling a return to a more hospitable environment for economic growth.