Gold vs McDonalds

“Gold gets dug out of the ground in Africa, or some place. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.”

-Warren Buffet

Like my boy Buffet, I still can’t get over why people put so much stock in gold when the stock market hits a recession or when international markets in general hit turbulence.  It makes little sense to me that this is what people do in order to feel more secure.  At the end of the day, when you truly examine gold as a substance, what gives it such a high intrinsic value that it makes people feel safe?  I can understand how owning a house or owning land could give someone a false sense of safety, and why someone might choose those as a relatively “safe” store of value.  They have obvious uses and while the price may fluctuate, I can understand the rationale behind the idea that those investments might be more secure (they aren’t, but at least I can understand the thought process).  Gold on the other hand is just a fairly useless precious metal.  It isn’t very strong, and its only real use is decorative.  Gold hoarders out there will talk in reverent tones about how fiat money is simple paper whose value is only derived from the meaning we give to it.  It is intrinsically worthless.  There is very little that separates paper from gold if that is your only argument.

A Special Kind of Crazy

Now I understand that gold has been a store of currency for thousands of years and all that jazz, but the truth of the matter is that just like any other commodity, it is an extremely volatile investment.  That volatility is because gold doesn’t really have an agreed upon valuation model, and consequently it doesn’t really have to obey any “investing rules”.   The price of gold is not truly subject to its relative merits or any quantifiable metrics.  People determine the value of companies by examining basic economic fundamentals such as how much money a company makes, how much debt it holds, and what its market share is.  Gold’s price is determined almost exclusively by irrational investor sentiment that is not tied to anything quantifiable.  If that is what you are basing your “run to safety” investments on, then I guess we are very different individuals.

What REALLY Has Value Anyway?

There are so many solid companies on the stock market today that are trading for 12x and 13x earnings that it really begs the question: Why are these companies considered any less “safe” than a precious metal whose colour we really like?  In my opinion, even if you are an ultra-conservative investor, stock in a company like McDonalds, or Johnson and Johnson makes much more sense than gold.  One could even argue that they should actually be safer than the bonds sold by many supposedly stable countries out there.  Take a look at Spain’s balance sheet and what its long-term prospects are with its youth unemployment rate, versus an international conglomerate that sells a product and/or services that have proven to be in demand for decades.  Are people going to stop liking cheap burgers and fries any time soon?  Are they going to stop brushing their teeth and needing diapers?  Things would have to get pretty bad before these consumer staples and mega brand names would be considered in any sort of risky position.  I feel much safer investing in a company like McDonalds which has branding that likely 60%+ of the world can easily identify on site, has several products that are proven winners as well as a history of innovating new ones, and finally, has one of the most valuable urban real estate portfolios on the planet.  Now THAT is diversity and true security, not hoping that people continue to panic and rush to gold while listening to the talking heads (that are getting paid by the gold companies by the way) telling you it has always been that way.

If Warren Buffet and your friendly neighbourhood personal finance blogger aren’t proof enough for you… then maybe I should just buy gold as a hedge against the collective stupidity of investors everywhere.

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Another fact to consider is that the idea of gold being negatively correlated with equities is more myth than fact. Talk-radio ads for gold sellers during times of market correction are just looking for suckers to take the bait.

I think that quote by Buffet either demonstrates a complete misunderstanding of gold or he is spouting misinformation. Gold has no utility? Really? Besides its industrial value for various electronic applications and its desirability for use in jewelry it happens to be the best form of money that has ever been discovered. It is far superior to fiat paper money, which can be created at a whim by counterfeiting governments. And that leads me to the explanation for why people are now buying gold. Stocks may go up in nominal terms but in an inflationary environment you will actually be… Read more »

“1) Gold is rarely used in electronics, and its use for jewellery could be argued to be merely taste-driven and subject to dramatic volatility. Also, those uses do not reflect its valuation in any way.” Demand and value is imputed for gold as they are for every other commodity. So of course this demand is reflected in its valuation. How much is debatable. “2) The best form of money ever invented? That’s a loaded statement. It is until the next thing comes along. It’s actually a terrible method of money for the modern economy because you would have a ton… Read more »

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