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Friday, 12 November 2010

Arguments Against Rick Ferri’s Take on Gold

The latest round of US money printing has pushed the price of gold above US$1400 per ounce. The attackers of gold have come out and criticized the metal, claiming it is a poor investment. Some blog gives Rick Ferri's Take on Gold, providing arguments against gold. After reading this article, I felt like I had to respond to the points made by Rick Ferri.

Argument 1: Gold ETFs will not protect you in the event of financial or economic catastrophe.

Response: Just because there is an economic catastrophe, it doesn't mean the banking system will collapse. It doesn't mean all ETFs will lose value. The GFC is an economic catastrophe, yet ETFs didn't all go to zero.

If you believe that there will be a total collapse of civilization such that banks will not functions, stock exchanges will be no more, airlines will not work, and so forth, then gold ETFs are not good. But this does not mean gold is not useful as an investment. In such an end-of-the-world situation, physical gold, which you can feel in your own hands, is preferable. Many people prefer physical gold rather than ETFs.

I am an ETF buyer. I agree that in an apocalyptic situation, I'll likely lose my money. If the banks collapse, I agree I will likely lose money. So what? That is a risk I understand and that is a risk I am willing to take. I happen to believe it is possible that there will be an economic catastophe that is extreme enough that it will cause enough fear and inflation (or even stagflation) to cause gold prices to skyrocket. All this can happen without all banks collapsing or the entire financial system completely being wiped out. Stagflation has occured during the '70s. It occured in the late '00s as well just right after the GFC when oil prices skyrocketed. Stocks will not protect you during stagflation. Gold usually does.

Argument 2: Investing in gold is like investing in bricks. Bricks produce no dividends. A brick will always remain a brick. One brick will not become two bricks.

Response: An investment does not have to produce dividends or cashflow to be good. Gold can go up in value as measured by particular paper currencies. Gold can also maintain purchasing power.

Here is what Rick says:

You can take a bunch of bricks and pile them in your backyard and look at them every day and say, ‘Go up in value, go up in value.’ But you can’t say, ‘What kind of dividends are my pile of bricks going to pay me this year?’ Because it’s zero. How much interest am I going to get from my pile of bricks? None. Is my pile of bricks going to become two piles of bricks over the next 10 years? No, it’s going to be one pile of bricks a year from now, 10 years from now, and a hundred years from now. You’re just hoping that someone comes along who thinks that pile of bricks is worth much more than you paid for it.
Dividends and cashflow are great. If you put money into a bank savings account, you get cashflow from the interest. Many other investments don't do this. Stocks pay dividends, yes, but the dividend yield on stocks is usually less than the income yield from cash investments, but people invest in stocks because they want capital growth. Not everyone cares about dividends. Some people want capital growth. Gold does not pretend to do pay dividends to create cash inflows. That is not the point of investing in gold. Gold can, does, and has gone up in value. In fact, gold has gone up in value more than any other investment in the last three decades.

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