Fascination with gold often overrated

By DAVID MOON, Moon Capital Management, LLC
September 16, 2007

In the days of King Nebuchadnezzar of Babylon in the sixth century B.C., gold was precious — even more so than today. It was a sign of royalty and wealth. Coins were made from gold. People were literally buried with their gold, tempting grave robbers.

In an attempt to get a jump on grave robbers, some enterprising young women had been known to appropriate the gold of elderly gentlemen just before their death, giving rise to the term “gold digger.”

In the cradle of civilization, if you had gold you could have anything. Historians tell us that during the reign of Nebuchadnezzar, a single ounce of gold could be exchanged
for 350 loaves of bread.

That’s pretty incredible.

Today, gold trades for about $720 an ounce. If you wanted to put that in terms of loaves of bread, that would only be about let’s see 350 loaves.

That’s right. In the last 2,600 years, the purchasing power of gold hasn’t increased a penny. Well, more accurately, it hasn’t increased a carbohydrate.

Then why is there such a fascination with gold?

First, it’s pretty. Women love it. And if there is anything we learned from the last 2,600 years or so it’s that men will do all sorts of irrational and weird things for the attention of a woman. Deep down, our fascination with gold is probably one of them.

Jewelry accounts for two-thirds of the world’s annual gold consumption.

In more modern times, investors have become convinced that gold is a safe haven in times of political upheaval or hyperinflation. Perhaps.

Would you wear a helmet and Kevlar vest on the golf course just in case some madman badly sliced a ball into your foursome? Then why put 10 percent of your portfolio into something on the outside chance that the financial world might collapse?

Since 1913, there have been only 10 calendar years in which inflation has exceeded 10 percent. Gross domestic product has declined more than 5 percent in only four years since 1930, and only twice more than 10 percent.

In the United States at least, gold bugs are trying to protect against a risk that is incredibly small and not terribly destructive — at least not in the long term.

Besides, if 90 percent of your portfolio collapses, what difference does it make if 10 percent of your portfolio doubles in price?

You have to work to get gold. It pays no dividend nor has any earnings. You even have to pay to store it. No wonder Warren Buffett describes gold as something that is taken out of the ground in South Africa, put back in the ground in Fort Knox or the New York Fed and doesn’t do anybody much good along the way.

David Moon is president of Moon Capital Management, a Knoxville-based investment management firm. This article originally appeared in the News Sentinel (Knoxville, TN).

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