The extremely articulate and savvy hedge fund manager Kyle Bass was quoted in 2013 saying, At some point in time I’d much rather own gold than paper. I just don’t know when that time is.
Like Kyle, many people desire to own gold based solely on the ostensibly inevitable, yet always hypothetical, doomsday predictions that call for widespread pandemonium and chaos that will ultimately render the major currencies of the world obsolete and better suited for fire starting purposes to stay warm.
However, perhaps there is a more realistic and plausible reason to own gold.
Many successful investors will often credit their success, in part, to diversification. Having assets appropriately allocated in the usual allotment of stocks, bonds, and gold ensures that a portfolio is in better shape to withstand the harshest economic times imaginable. This alone is a highly convincing argument to own gold. In spite of the idea of hedging equity or fixed-income investments, owning gold also ensures that an investor literally has exposure to the gold marketplace.
Unequivocally, the key difference between gold and any monetary currency in the world, like the American dollar, the euro, the rand, etc., is the unavoidable fact that gold cannot be duplicated. Therefore, at its very core, the fundamental law of supply and demand ought to be enough to convince everyone to own gold. Regardless if you are looking to achieve a well-balanced investment portfolio across different asset classes or are simply buying gold coins, the fact of the matter is you are gaining exposure to a market with a limited supply. But what does this entail?
Unlike virtually every paper currency in the world, it is a certainty that central banks, or anyone for that matter, simply cannot print more gold. What is not a certainty, however, is the population of the world remaining stagnant and slow-growing for years to come. In fact, this is highly unlikely; common sense and history underscore the relationship between increased time and increased population growth.
Because of this, from the most basic level, we know two certainties when talking about gold:
- There is a finite amount of gold in the world.
- The population of the world is constantly increasing.
As the population increases, there will be less gold for more people, and this will result in the willingness, if not the necessity, to pay more in order to own gold. It really is that simple. The supply and demand of gold, which is ultimately a major determining factor of its price, is clearer than almost any other commodity. Moreover, from a usage standpoint, gold will stay important and relevant into perpetuity because of its financial uses, whereas a commodity like crude oil will likely face dwindling demand moving into the future as alternative fuel sources become more prevalent.
Naturally, because all of these facts lead to a logical conclusion, this raises the unavoidable question of why everyone in the world doesn’t realize this and own gold?
As it turns out, most sophisticated investors do indeed maintain a position in gold. As Kyle Bass explains again, we’ve always had a position in gold. It is important to note that if you want to have a position in gold like many prominent hedge funds and institutions, it need not be through gold futures, an ETF or other investment vehicle. Owning gold in its physical state of coins, bars or bullion is just as effective in regards to market exposure, because this is what the electronic forms of gold investing are based on, and its undeniably more exciting.
Although there seems to always be chatter of needing to own gold as insurance for the day fiscal policy globally collapses, a far more likely scenario is that gold, over time, will increase in value due to the basic laws of supply and demand and those who do not own it will miss out on an a lovely investment and diversification asset.