Gold is God? I won't have a bar of it

Higher rates curb the appeal of bullion because it doesn't pay interest or offer returns, unlike competing assets. Photo / Bloomberg

I hesitate before deciding to share my thoughts regarding gold. Last time I wrote about gold, I had fanatics tell me how clueless I was about the greatest asset of all time.

All because I dared to suggest it is not the safe, never-fail investment it is sometimes made out to be.

I am prepared to suffer another backlash because my view is unchanged, and the gold price, which has fallen 8 per cent this year and is now close to a five-year low, suggests others share my view.

Gold is an intriguing asset. Textbooks have always pointed to gold being universal legal tender, accepted virtually everywhere as a means of payment. Governments and banks hold it in safes and forts. It is the most precious of all precious metals. It acts as a hedge against inflation and is generally owned by investors for safety's sake as it may not fall in calamitous times in the way paper currencies might.

There is a mystique about gold; embossed gold bars and molten gold are more visually appealing than other traditional assets. But as an investment, gold is not clear-cut; there are as many detractors as supporters.

Gold doesn't meet the traditional criteria for an investment. Gold has limited intrinsic value, no cashflow, no earnings, no yield.

It is generally owned by pessimists as a safety net, whereas most other assets are bought by optimists who buy shares, property or bonds because they think their value will increase.

Warren Buffett has said gold's two biggest shortcomings are: it is not of much use; nor does it produce anything. In 2011 he compared the world's stock of gold (about 170,000 metric tons) with a bundle of productive assets of equal value. The productive assets included all US crop land (160 million hectares producing US$200 billion of crops each year) and 16 Exxon Mobils (the world's most profitable company at the time).

Buffett suggested that in a century the farmland would have produced staggering amounts of crops and Exxon would have delivered trillions in dividends, owning assets worth trillions of dollars. Gold on the other hand would be unchanged in size and still incapable of producing anything.

Gold investments should come into their own in times of uncertainty. The more uncertain the outlook and the bigger the crisis, the better the gold price should perform. Inflation, deflation, government borrowing or a plunging currency - whatever the concern of the day, gold is supposed to be a refuge.

But it has not behaved as the textbooks suggest and gold fans would like. After the most recent price slump, many are saying gold has permanently lost its lustre.

With so much uncertainty in recent years - low economic growth, prolific use of money printing, European woes and the potential of a Greek default - you'd think gold would have been easily the best performing investment. But it hasn't performed and it is hard to see how gold will regain its former glory.

One commentator suggested recently that gold has been shown to be less an investment and more a religion! He says gold supporters typically share a belief system - they believe the outlook is negative and owning gold is the only way to survive a financial or economic crisis.

While the evidence from historic crises and corrections is inconsistent - sometimes gold has performed well, other times it hasn't - gold fans nevertheless continue to believe it will prevail. In many instances, they believe it so fervently they become almost evangelical in promoting its virtues. To this extent at least, gold can be likened to religion.

Regardless, gold has a substantial fan club, is traded regularly and enjoys price rallies which can last a long time and are seemingly unstoppable. Until they stop.

This column is presented in association with Fisher Funds