Gold As Protection From Crash!

Key Concepts

• Prudence in Investing: The necessity of being cautious and careful in the current economic environment.
• Hedging: Strategies to protect investments against potential losses.
• Dividends and Value Investing: Focusing on income-generating assets and assets undervalued by the market.
• Gold as Protection: The role of gold as a potential hedge against economic instability.
• Money Printing and Inflation: The relationship between government monetary policies and the value of currency.
• Productive Assets: Investments that generate income or appreciate in value through their inherent utility or production.
• Fund Flows: The movement of money into and out of investment assets, influencing their prices.
• Supply and Demand: The fundamental economic forces that determine the price of commodities like gold.
• Buffettian Investing: An investment philosophy, attributed to Warren Buffett, that emphasizes productive assets and intrinsic value.

Gold as a Hedge and Investment

The discussion begins by revisiting the concept of prudence in investing, following previous discussions on hedging, dividends, and value investing. The focus shifts to gold as a potential form of protection. The speaker expresses a belief that gold could reach $10,000, citing the current political climate where politicians, exemplified by Trump, are perceived to be printing money and distributing it, such as through a $2,000 dividend per person. This policy is seen as banking on short-term memory and "first-level thinking" where immediate financial gain is prioritized over the understanding that such distributions are often funded by taxes or debt, thus not fundamentally changing an individual's wealth.

However, despite this prediction of a high gold price, the speaker explicitly states they do not own any gold. The only gold mentioned is a thin coin inherited from the time of Emperor Franz Joseph, which is considered a family memento rather than a significant investment.

Reasons for Not Investing in Gold

The primary reason for avoiding gold investment is its classification as a non-productive asset. The speaker identifies as an "arrogant value investing prick" who believes they can achieve better returns with productive assets.

• Price Drivers: The price of gold is primarily driven by fund flows – inflows when people are excited and prices rise, and outflows when sentiment shifts and prices fall.
• Lack of Fundamental Explanation: There is no fundamental way to explain gold's price beyond market sentiment and the cyclical nature of booms and busts.
• Historical Performance: The speaker points to periods of "desperation" for gold investors, highlighting that even gold miners, which were explored during such times, did not offer consistent returns. A significant risk identified is the possibility of a 5-10 year period of stagnation or decline for gold, even if the current exuberance suggests otherwise.
• "Digging Holes" Analogy: The speaker uses a metaphor, "You dig it out of the ground to dig another hole and put it in," to illustrate the lack of inherent utility or production in gold.
• Goal of Outperforming Inflation: The speaker's personal investment goal is to "do better than inflation," and while gold has sometimes achieved this, its performance can be inconsistent. For instance, 12 months prior to the discussion, gold's performance relative to inflation was not significant.
• Fickleness and Uncertainty: Gold is described as "too fickle, too much supply and demand." The future demand and supply of gold are unpredictable, making it an unreliable asset for wealth accumulation.
• Buffettian Philosophy: The speaker aligns with a "Buffettian" approach, emphasizing that without utility or production, an asset is not favored.

The Future of Gold and Productive Assets

While acknowledging the current "great run-up" in gold prices and advising those who own it to enjoy it, the speaker warns that with the price more than double, the risk is also doubled. The likelihood of future returns is deemed impossible to know because it hinges entirely on future supply and demand dynamics, making it a gamble.

The core argument is that productive assets will perform better regardless of gold's performance. This is because productive assets "make something," whereas gold's value is not tied to production. Even if gold were to increase by 10% based on inflation, the speaker's objective is to achieve returns exceeding inflation.

Conclusion and Personal Strategy

The speaker concludes that gold investment is a personal decision. They reiterate their belief in productive assets and their strategy of value investing. For those interested in combining value investing with their own goals, the speaker directs them to their research platform or "other value quadrant." The uncertainty surrounding gold's future price (in 5, 3, or 7 years) is emphasized, as theories about money printing or low interest rates do not guarantee predictable outcomes. The current high price of gold is seen as increasing risk without a clear path to predictable returns.