Why would anyone want to own gold?

published 26 June 2006

We own a nice big chunk of the magic yellow metal. Each bar weighs about 12 kilograms (26.5 pounds) and so consists of some 400 ounces of the one atomic element that has seemingly fascinated man forever. Gold.

When we started investing in this barbarous relic, there was no press. Its only mention in the Wall Street Journal was a small entry somewhere in the fine print at the back, a little down from pork bellies: 'Gold: $270-and-change-per-ounce.'

Strangely enough, recent months have elicited a far greater interest in the substance. This only goes to demonstrate, once again, that people tend to buy things which have been going up for a while and that they generally buy them on mounting expectations that they will go higher still and that the market for them will grow more and more wild.

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But what is the attraction of this singularly inert element? After all, it is far less useful to industry than, say, copper or iron ore and it pays neither interest nor dividends - in fact, it even costs money to store it.

Why own gold? Stability

Some say that gold is money. We tend to think that it was money and that it ought to be money once again. But the idea that today it is money is, at best, a highly dubious one. Try paying for your next bag of groceries with a few grams of gold dust if you don't believe us.

Some view gold as the last hope of a world monetary system which has grown perilously unstable, for all the reasons we have taken such pains to set out at length in this letter. Others hoard it for fear of an imminent stock market crash, or from worries about the housing bubble, or lest the banking system collapses.

However you look at it, there is no other hard asset that has the number of disciples, or the acres of newsprint and bandwidth devoted to it as gold. We hear a multitude of self-appointed 'gold experts' milling about, each with their own angle to get across. They run the range from paid-up monetary cranks via Midwestern militiamen to Elmer Gantry-style fake preachers. Often, they are dedicated to nothing more than merchandising.

Why own gold? Liquidity

We fear that over the many years, more money has been made by those touting gold than by their customers. The principle that fear sells just as well as greed still holds true in our unsettling times. For our part, our continued interest in gold is a little more measured. As we have made clear already, we would rather have something it takes time effort and money to create than that paper money itself, but gold's added benefit is that, among hard assets, it is uniquely liquid.

The contribution of gold to our past results, particularly in 2003, has been significant. We are fairly confident that, sometime in the next few years, it might add considerably to our profits, once again.

Conversely, one day we may find ourselves with plentiful opportunities from which to select sound investments, selling at sensible prices. If and when that moment comes, then, without any hint of sentimentality or regret, our gold holdings will be unceremoniously reduced, perhaps even liquidated, and the proceeds will be eagerly shovelled into the furnaces of entrepreneurial wealth creation.

From the EdelweissFunSage Capital (Bermuda) Lt