There was a very interesting article in The Wall Street Journal on May 27th, written by Brett Arends titled “Why I Don’t Trust Gold.” This was the second in a three-part series in which he speculates that gold will go up. However, we think he captured the argument against gold better than we ever have.
In the article, Arends quotes Warren Buffett, “Gold gets dug out of the ground in Africa, or someplace. 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.”
How true is this? We often see that investors want to buy gold because it is a hard asset, and they are scared. If you’re sitting on a pile of gold bricks, won’t you be just as scared someone will steal your gold?
Our first point is that there is no shortage of gold. Since 2002—an eight-year time span—22,500 metric tons of gold were in demand from all industries including jewelry, goldsmiths, dentists, etc. In that same period, 29,000 metric tons of gold were mined. There is just no shortage.
Here is the kicker argument as Arends writes it:
Lots of people have been buying gold in the hope it would rise. But the only way it can rise is if still more people buy it, hoping it will rise still further. And so on.
What do we call an investment scheme where current members’ returns depend entirely on new money brought in by new members?
A Ponzi scheme.
And that is exactly how we feel about gold.
Disclosures
This article is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
