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I Own Gold Because…

26 March 2010 5 Comments

You can hear many arguments why you should or shouldn’t own gold, but I think I recently read the most important and succinct argument for owning gold.  In a recent article on ZeroHedge, Dylan Grice’s views on when to sell gold are laid out for everyone.  The following statement is beautiful:

The reason I own gold is because I’m worried about the long-term solvency of developed market governments

And there you have it.  That is good enough for me.  Most of you are probably saying to yourselves right now, “what the heck is he talking about” or “that quote sucks” — well then you don’t understand the implications of the solvency risk with the U.S., western Europe governments… throw in Japan too.

With the economy falling off a cliff a few years ago, the only support has been governments.  Imagine a person holding a heavy, giant ball above their heads.  It’s heavy and very tough to keep above his head.  Then, imagine someone coming along any whacking him in the knee (Nancy Kerrigan style).  He would probably fail to hold the ball up after getting whacked in the knee.

This is similar to the governments propping up the global economy.  Insolvency is like getting whacked in the knee while holding up the economy.

You’ve probably heard of the Greece situation by now.  Earlier this week, Portugal had its credit rating cut as well.  These are continued indiciations of the solvency risk for developed countries.  You may have seen the acronym PIIGS.  It refers to Portugal, Italy, Ireland, Greece, Spain — the countries many believe to be at risk of financial collapse.  How many of these would it take to pull down the entire European Union?  Meanwhile, the UK is struggling.

Again, I’m owning gold because I am skeptical of the ability for governments to continue to print money to prop up economies all over the world.  Something has to give at some point, and it’s likely to be ugly.  Gold is about as secure as it gets in such a scenario.

To effectively sell gold bullion or bars, one must first understand the ins and outs of this sometimes volatile business.

5 Comments »

  • eric1985 said:

    This is an interesting analysis. My only worry with gold is that it is being overvalued excatly because of the reasons you talk about above. When I look at buying an investment, I have to look at the intrinsic value of what I am buying. For a stock, I can easily pull out numbers that give me the company's free cash flows and DCF value. But what is the intrinsic value of gold.

    Gold's value is determined 100% by basic economics at work. The only things that can change the value are a change in supply or demand. You have given us a great scenario as to why gold has had a record run up in price over the last year or so. Demand has increased dramatically. However, I find it very difficult to objectively measure demand. I can't decide what gold is really worth, so I am afraid to buy it for over $1,000 per ounce.

    Just my humble opinion and thoughts. Keep up the great writing.

  • 20smoney (author) said:

    Completely understand and I definitely think approaching gold is very different than approaching investing in a stock like Apple (AAPL). It's more insurance than an investment. Thanks for the comment.

  • Tom said:

    Thank you for this article. I have purchased some gold (GLD) paper, but have not bought any physical gold. My question lies here: What is the percentage of your wealth/worth that is in Gold, or any commodity for that matter. What percentage of your wealth is in physical gold?

  • 20smoney said:

    I mean most people would recommend 10% at the most. It really depends, I mean for a young person like myself without much net worth, its less important. For someone with significant savings in cash, I'd definitely hope you hedge against inflation somewhat.

    I don't own any physical gold at this point just coz I don't have the cash to spend on it. I'd like to purchase a few gold coins when the opportunity arises.

  • Jewellery Singapore said:

    Investing in gold is very good as the rates being increased so investing is really good.Good post as provide good information.And also gives idea.