GuruFocus Premium Membership

Serving Intelligent Investors since 2004. Only 96 cents a day.

Free Trial

Free 7-day Trial
All Articles and Columns »

Gold a Great Hedge Against Declining Dollar - Not the Next Big Bubble

March 22, 2012 | About:
Gold has been on a 10-year uninterrupted rally which has led gold prices to the current price of $1,652. One would ask after so many years of quality gains, wouldn’t there be a pullback? Ordinarily, yes and I bet there will be some sort of a gold pullback in the next year or so but gold has become the new type of value investing.

Obviously, when something rallies this much for that long, through good times and bad times, it is a value investment. Gold has been turned into a hedge, a flight for safety, rather than just for jewelry or currency. This hedge protects against inflation most of all and market uncertainties. It has taken on a more of a U.S. Treasury type of safety but with higher returns.

However, it is not accepted fully by the investment community that gold investing is a type of value investing. Warren Buffett, for instance, is firmly against the idea that gold can be a value investment. Back in 2010, Buffett was interviewed by Fortune Magazine and when he was asked about gold as a good value investment, this was his reply:

“You could take all the gold that’s ever been mined, and it would fill a cube 67 feet in each direction. For what that’s worth at current gold prices, you could buy all — not some — all of the farmland in the United States. Plus, you could buy 10 Exxon Mobil’s, plus have $1 trillion of walking-around money. Or you could have a big cube of metal. Which would you take? Which is going to produce more value?” (Warren Buffett, Fortune Magazine).

Obviously, Buffett is against the idea and he does bring up some good points. However, his argument is a bit overblown because most retail investors are dealing with a very fractional amount of gold — not all the gold ever mined.

Gold is a very solid value investment, especially these days when you have uncertainty in Europe, shaky U.S. recovery and skyrocketing stocks. In this scenario, holding gold sounds like a brilliant plan. Although you may not be getting the high returns that everyone else is getting with stocks right now, when the market turns you will have the last laugh. David Einhorn and John Paulson are among many other value investors who own gold.

All in all, gold has proven to us that it can hold its value pretty darn well and that it is a fantastic hedge against inflation, which is expected to be a problem later this year. In times of uncertainty or high volatility go take shelter in gold.

About the author:

Jacob Wolinsky
My investment ideas have been inspired by many of value investors including Benjamin Graham, Charles Royce, John Neff, Joel Greenblatt, Peter Lynch, Seth Klarman,Martin Whitman and Bruce Greenwald. .I live with my wife and daughter in Monsey, NY. I can be contacted jacobwolinsky(AT)gmail.com and my blog is www.valuewalk.com

Visit Jacob Wolinsky's Website


Rating: 1.5/5 (36 votes)

Comments

coda
Coda - 2 years ago
"Obviously, when something rallies this much for that long, through good times and bad times, it is a value investment" Please explain your reasoning,it doesn't look like you understand what is value investing.Tech stocks weren't a value investment in '98 but they kept going up.

"Obviously, Buffett is against the idea and he does bring up some good points. However, his argument is a bit overblown because most retail investors are dealing with a very fractional amount of gold — not all the gold ever mined" Does it means that it becomes useful or that it starts producing cash-flow when it's a fractional amount?

Looks like anytime you write obviously you are about to say something stupid.
alysomji
Alysomji - 2 years ago
Terribly written.

I expect better, Jacob, and know you're capable of better.
mo77
Mo77 - 2 years ago
Jacob,

Using Ben Graham speak, how can gold be anything but a speculation as opposed to an investment.

The main problem with gold as I see it is how can you measure the value of it or any commodity or currency? There are certainly a great many smart investors that I respect who hold significant amounts of builion (David Einhorn, Charles De Vaullx, Jean-Marie Evelliard). But to follow their thinking is dangerous, because I don't know what metrics of measurements and what information they utilize to derive when to enter and when to exit this position.

I recall reading an article on Bloomberg not too long ago about gold and all time peak for gold adjusted for inflation was around 1978-79. If you adjust for that period in today's dollars they said it the price comes to around $2300, based on the current price versus the all-time high you theoretically have about 41% potential upside.

AlbertaSunwapta
AlbertaSunwapta - 2 years ago
Take yourself back to the late 1990s ask yourself if gold is a great investment. At that point you'd have had to suffer through nearly two decades of inflation without a significant repricing of the precious metals. As for currency devaluations I can't say but I do know currencies fluctuated. After the fact, anything that has risen in value is ALWAYS defined as a good investment.

I would suspect that the run up in gold in the 1980s created a huge over supply and excess production capacity the persisted for years. I'd further guess that the over supply lasted until mines closed down and population growth (in India etc) caused a shortage to occur.
mmel
Mmel - 2 years ago


Did someone hack Jacob's account? This is truly a bizarre article. Makes a bunch of speculative statements, backs up none of them with facts, and doesn't even include an idea of what the underlying value of gold would be, so as to show there is a margin of safety and demonstrate it is an intelligent investment. What is the deal?
LwC
LwC - 2 years ago
AlbertaSunwapta,

"I would suspect that the run up in gold in the 1980s created a huge over supply and excess production capacity the persisted for years. I'd further guess that the over supply lasted until mines closed down and population growth (in India etc) caused a shortage to occur."

The question about the supply of gold is IMO a very interesting one. A while back after reading about gold "investment" in another thread I did a little research and discovered that at least through 2010 the new supply of gold has exceeded the additional demand YOY for many years. I doubt that has changed, but I haven't checked it out. FWIW here's what I wrote in that thread:

"_However, while we can probably safely assume that projected demand for gold for jewelry and industrial use will continue to rise, I'm not as sanguine that there will be a major restriction in the projected supply of gold. Having written that, I of course admit that my crystal ball is no more or less cracked than yours.

I hope you don't mind if I point out a few salient facts. According to the World Gold Council, during 2010, and in previous years, the annual added supply of gold exceeded the demand. If the annual supply of gold remains about where it is today (which would be consistent with recent history), it looks like the demand for gold for jewelry and industrial use could continue to increase for years before the demand sops up the excess annual supply currently entering the market. About two-thirds of that gold came from mining and the rest came from recycled gold. The added supply from "official sector sales" was basically immaterial historically and in 2010 was actually negative since government agencies bought in more than they sold. Apparently this represents a change from about two decades of consistent net gold sales by the official sector. It looks like most if not all of the recent run up in the price of gold has to do with the increase in investment demand, a dynamic that can change very quickly.

Current estimates of total privately held-for-investment gold are less than 2,000 tonnes, about half of estimated annual additional supply. Official gold holdings are estimated to be about 30,000 tonnes, about 20% of the estimated total amount of gold ever produced. There are some estimates that gold mining companies control about 50,000 tonnes of in-ground verified gold resources.

My purpose in pointing out these statistics is that IMO it's clear that there is a potentially huge overhang in the supply of gold and because so much of that potential supply of gold could very quickly enter the market, it may not be easy to draw conclusions about the supply/demand relationship from a conventional point of view. For an extreme example (suddenly nobody is afraid anymore and they decided they would rather have new cars, new houses, etc), if the current estimated investment demand for gold decreased by one-half, that would amount to about 15% of current estimated annual added supply, and IMO that would have a huge effect on the price of gold. By way of analogy, the current demand for oil is about 88million barrels per day. What might happen to the oil price if suddenly the demand dropped to 75 million barrels?"

batbeer2
Batbeer2 premium member - 2 years ago
I'll say one thing for gold:

That stuff is worth its weight in gold.
yswolinsky
Yswolinsky - 2 years ago
I should have stated some things differently but this was a short piece, It would really take at least a few pages to analyze this issue properly.

Please leave your comment:


Get WordPress Plugins for easy affiliate links on Stock Tickers and Guru Names | Earn affiliate commissions by embedding GuruFocus Charts
GuruFocus Affiliate Program: Earn up to $400 per referral. ( Learn More)
Free 7-day Trial
FEEDBACK