25 March 2016

Jim Rickards 'New Case For Gold' At the Foreign Correspondents Club of Japan

"Gold is not an investment, because it has no risk and no return. Warren Buffett's well-known criticism of gold is that it has no return and therefore no chance of compounding his wealth.

He is right. Gold has no yield; it is not supposed to, because it has no risk. If you buy an ounce of gold and keep it for ten years, you end up with an ounce of gold— no more, no less. Of course, the 'dollar price' of an ounce of gold may have changed radically in ten years. That‟s not a gold problem; it is a dollar problem.

To get a return on an investment, you have to take risk. With gold, where is the risk? There is no maturity risk, because it is just gold. It will not mature into gold five years from now; it is gold today, and always will be. Gold has no issuer risk, because nobody issues it. If you own it, you own it. It is not anyone else's liability.

There is no commodity risk. With commodities there are other risks to consider. When you buy corn, you have to worry: does it have bugs in it? Is it good corn or bad corn? It‟s the same thing with oil; there are 75 grades of oil around the world. But pure gold is an element, atomic number 79. It is always just gold...

Wall Street sponsors, U.S. banks, and other members of the London Bullion Market Association (LBMA), have created enormous volumes of 'gold products' that are not gold. These are paper contracts. These products include exchange-traded funds, ETFs, the most prominent of which trades under the ticker symbol GLD. The phrase 'ticker symbol' is a giveaway that the product is not gold. An ETF is a share of stock. There is some gold out there somewhere in the structure, but you do not own it— you own a share. Even the share is not physical; it is digital and easily hacked or erased."

Jim Rickards, The New Case For Gold

It is true that money provides no interest payments if it is truly money. If you hold US dollars as cash, for example, you obtain no interest or dividends on them. If you did, it would interfere with their neutrality as a medium of exchange, as people would tend to save, hold, hoard them.

You get the interest from money by 'loaning' it to someone else, and accepting a form of obligation with risk, thereby obtaining interest payments as compensation for that risk. This is what a bank deposit has been traditionally, at least before the days of confiscatory negative interest and the gross and purposeful mispricing of risk.

The same is true of government bonds, which are not money but loans with risk compensation as interest payments.

However gold is natural money, and not 'official money' because it is recognized as such by few governments, and must be exchanged for the official currency in payment of taxes for example.

I would quibble a bit with Jim about gold not being an 'investment' if I was inclined to split hairs, because it can be and is often used as a long term hedge for example, against loss in dollar assets based on dollar devaluation as inflation.

His colleague sitting next to him on the dais in Tokyo describes gold in a hedging trade which he is now holding. Why would the other components of the trade be considered investments if held long enough, but not the gold? Perhaps one might calls this a 'speculation' rather than an 'investment' but I fail to see the difference.

Land is thought of as an investment in the common language, even though it pays no interest and generates no income in and of itself except as it is hired our for use, or used directly as a component of some overall productive endeavor, with risk.

And if I hold a tech stock for ten years that pays no dividends, is this not still a type of 'investment?'

Typically the difference between 'trade/speculation' and 'investment' have been related to duration and the volatility of the difference between the expected and unexpected outcomes. It is a small distinction, but I am not willing to conceed this to Buffett, who seems to betay a narrowing of outlook that often comes to those too heavily specialized for too long in one thing or another.

Depending on the assumptions which one has made, the manner in which the holding of the asset is structured, and especially in regard to intended duration, I can see any number of instances in which gold and silver can be considered 'investments' without paying dividends and interest, but having some probablility of gains against some other thing.

As for stocks and other assets, I don't even wish to think about the times that some short term 'trade' has turned into a longer term 'investment' because of some poorly estimated probability of risk and duration.