Cover of MoneyWeek magazine issue no 549

On the edge

5 August 2011 / Issue 549

Are we heading for another recession?

PLUS:

  • Buy this cheap shipping stock now
  • What Warren Buffett is missing in Japan
  • How Angry Birds took over the world

Excerpt

It makes sense to buy gold

What is gold’s true value? Both the FT’s Lex column and The Economist have had a crack at answering this in recent weeks.

The Economist uses an elaborate method of taking the gold price in a range of currencies ‘backed by a sound balance sheet’, including the Canadian loonie and the Swiss franc, and comparing the current price to the historical average. Even against the ‘safe haven’ of the franc, gold is overvalued by 60% on this basis. Lex is less thorough. It notes the “price is still about 30% below its January 1980 peak, adjusted for inflation”. But then again, it adds, there’s “no reason for gold to sell at any particular price”.

What both publications share is a belief that gold is in a bubble. Underlying this is a sense that there’s something irrational, or even plain stupid, about owning gold. I find this fascinating. I think we can all agree that the world needs a medium of exchange – otherwise we’d still be bartering with one another and we’d never get anything done. And of all the raw materials out there, from copper to cocoa beans to cockle shells, gold is the best option. It’s durable, there’s not a lot of it around, and it’s not useful for much else (this lack of utility is the main reason gold is a better monetary metal than silver).

Now, I’m not saying that gold is a sure thing, or that the market is incapable of ever forming a bubble. It’s happened before and will happen again. But what I can’t understand is this stubborn intellectual conceit that investing in gold at all is irrational.

• Read the full editor’s letter here:  It makes sense to buy gold