Gold's Gofers
By Jim Griffin
Special to TheStreet.com
02/10/2002 09:00 AM EST
Last week the price of gold rose by 6.1% while the S&P 500 fell by 2.3%. That's quite a nice annualized return if you were long the former and short the latter. But you weren't, so why should we pursue the topic?
Good question. I have never understood the fascination with gold as an investment asset. It has a nil yield, or negative if you own enough of the stuff to mandate that you pay for secure storage and insurance. The way you make money in gold is through price appreciation, the same as with dot-coms.
That might seem like a cheap shot to a gold bug, but there is an ominous supply overhanging the market -- the world's central banks are weak holders, and in huge size. The Europeans in particular have let it be known that they want to shrink their holdings, for a variety of reasons, including those that arise when 12 central banks merge into one.
I'm a Timex, not a Rolex, kind of guy, so maybe that explains why I don't get it. To me, gold as an investment seems much like new cars as an investment, i.e., not good. But cars at least have something utilitarian in their favor: they can haul your carcass and miscellaneous effects down the highway, which gold can't do. And the right car might even enhance your social life, whereas "wanna go to my safe deposit box and look at my rands?" is a really lame pickup line.
Gold is my subject this week because a correspondent asked me what I thought about last week's move and my first response was that I don't think about gold. But then, on second thought?
The primary reason to own gold is for a store of value. A store of value, not a source of income, not a promise of growth. When everything else falls apart, when this civilization falls by the wayside, gold may prove useful in a Road Warrior world when your platinum card reverts to plain plastic.
If you think of Armageddon as a realistic planning scenario, you probably see more value in gold than I do. If you believe the institutions of 21st century society and its economy may break down, you're a better buyer of the barbarous relic than I am.
That's the best I can do to hazard a guess about the meaning, if any, of last week's move. There have been enough buyers around in the past two weeks to propel gold to its best rally in a year. Maybe those buyers have a less narrow view of the role of gold in a portfolio than I do, but even if they were to adopt my framework, last week there was enough evidence of institutional distress to justify upping the bid just a bit.
Argentina. It is appalling to watch its economy implode. This is a nation that, by all rights and endowments, should be rich. But the mismanagement of its institutions, government finance in particular, behind the prophylactic screen of a now deceased dollar-linked currency board, has left it bankrupt. The banking system is on the verge of collapse, unemployment is rocketing higher, shops are closing, and the purchasing power of money and the value of savings is plummeting.
It is not easy to see a solution to these problems in the absence of a white knight, someone to bail out and restructure the finances of the system. But Argentina has had that sort of expensive help in the past and seems not to have learned what is required to avoid needing it again. White knights, the International Monetary Fund and U.S. Treasury in particular, are reluctant to risk throwing good money after bad.
Japan. It is appalling to watch its economy implode. This is a nation that is rich, and appears to have decided to live by clipping the coupon. If it didn't have so much wealth to fall back on, it might be Argentina. Its demographic profile reveals that it has one of the fastest-aging populations among the world's nations. It may no longer be capable of acting as the engine of regional growth that it once was, but it need not be a global dead weight.
But its institutions, of political responsiveness, corporate governance, and banking acumen, have allowed a modest bit of financial cancer to metastasize into something quite nasty. By propping up dead companies and bad banks rather than excising them as surgically as might have been possible, by maintaining the economy on an intravenous drip of public investment, Japan's leaders have brought it to the point of having virtually no positive, nonradical alternative to genteel decline.
When you look around, there is some evidence, sparse though it may be, of the collapse of civilization: what is happening in Japan and Argentina must feel like a close approximation to their citizens. And gold is a global commodity, so the institutional stress that might make it relatively attractive as a portfolio hedge might arise anywhere in the world to affect its price.
Here at home, there is Enron, et al. Isn't it heartwarming how Enron has brought about a spirit of bipartisanship in the Congress? The corrosive effect of crooked and/or misleading bookkeeping may fall short, at least so far, of the crisis and malaise in other parts of the world, but it undercuts confidence in "the system," raises risk premiums, depresses multiples and increases the relative attraction of an investment alternative as lumpy and unlovely as gold.
To me, gold has no place in a retirement saver's account. Globalization is bearish for gold; just look at the effect of the integration of the European monetary system on the size and form of necessary central bank reserves. I believe globalization will proceed toward ever more economic integration because the irresistible forces of technological possibility and the profit motive are propelling it. The world's mightiest nation is propelling it. I don't want to invest against such tides.
But globalization is stressful; it is all about change, after all, and the challenges of responding to change. When those challenges are handled badly, when institutional response is such that those institutions are imperiled by the irresistible changes at work in the world, it may feel like civilization is at risk. It may make gold appear to have a role in financial planning that, blessedly, I have not been forced to understand.
Wishing you the same.
Jim Griffin is the chief strategist at Hartford, Conn.-based Aeltus Investment Management, which manages institutional investment accounts and acts as adviser to the Aetna Mutual Funds. His commentary on the financial markets is based upon information thought to be reliable and is not meant as investment advice. While Griffin cannot provide investment advice or recommendations, he invites you to send comments on his column to Jim Griffin.
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