I’m a free-market guy, and I’m a free-market guy without reservation.
I’m convinced that everything (and I’ll repeat “everything”) can be supplied more efficiently and to satisfy consumer demand to the greatest degree if it can be supplied through a market process. This process allows profits and losses to occur and entrepreneurship and capitalism to coalesce sans outside manipulation.
I pull no punches; I include services most people believe only government can provide: education, fire protection, and roads. To that triumvirate I’ll add military and policing.
Because a free-market process is prohibited in the aforementioned services, a clearing price never forms, and inefficiency prevails. Yes, you can assert that the United State should spend $700-billion annually on the military, social security, infrastructure, or whatever, but it’s impossible to prove without a free market.
I include money in the mix. Money would be best formulated and provided by participants in a free, unhampered market. If you and I, along with the other 330 million citizens of the United State, were empowered to coronate something as money, I’m sure we’d naturally converge, driven by our self-interest, to deem gold (and silver as a supplement) as money.
Gold would win because it originates from a base that transcends money. Gold possesses unique conductivity properties. Gold has aesthetic appeal. Gold is inert and harmless to humans. Gold doesn’t corrode, so it makes for excellent dental fillings. Gold can be salutary; it can offer relief in some cases of arthritis.
Gold has value that transcends money, but gold is nonpareil as money: Gold, is durable, divisible, scarce, uniform, portable, and valued. What more to do you want?
So, call me a gold-bug if you will, but just don’t call me a gold investor.
Gold or Stocks: Gold Generates No Cash Flow
I own no gold, because gold is no investment. It generates no cash flow on its own. Gold is an asset, to be sure, but that’s all it is. It’s not even insurance in times of chaos and tumult. (What insurance did gold provide Russians and Chinese after the Bolshevik Revolution and the People’s Liberation Army?)
When all hell breaks out to the extreme — when borders are closed, property rights are abrogated, freedom of movement and speech are crushed — gold offers nothing. A brick of concrete will serve as well as a brick of gold.
On the other hand, when borders are open, property rights are enforced, and freedom of movement and speech are allowed, gold offers at best a hedge against currency manipulation. Gold can’t create wealth, and I include the business of harvesting gold from the earth.
Mining has always been a lousy business. Valuing any mining stock is an exercise in guesswork. I’ve never liked the gold-mining business; it attracts businessmen of dubious character and investors of dubious intelligence. Everything about gold mining is inscrutable.
Yes, I’m familiar with the pro-gold arguments: Gold is no one’s liability; gold has never gone to zero. To which I counter, so what? The rocks in my backyard are no one’s liability; the S&P 500 has never gone to zero either.
Wealth can be created only by individual’s accepting a liability (and a responsibility). An entrepreneur takes on the factors of production — employees, capital, and land — to transform them into a good or a service that consumers may or may not demand. Simply owning a gold brick and storing it in a safe does nothing to perpetrate wealth.
Gold or Stocks: Historical Perspective
A historical reference highlights why accepting liabilities in business ventures, as opposed to accumulating gold, is the preferable path to accumulating wealth. The following quoted was recorded in a 1770 essay from French philosopher Guillaume-Thomas-Francois:
The Spaniards though possessed of all the gold in the world remained or became poor; the Dutch presently acquired riches, without either lands or mines. Holland is a nation at the service of all the rest, but who sells her services at a high price. As soon as she had taken refuge in the midst of the sea, with industry and freedom, which are her tutelary gods, she perceived that she had not sufficient quantity of land to support the sixth part of her inhabitants. She then chose the whole world for her domain, and resolved to enjoy it by her navigation and commerce. She made all lands contribute to her subsistence, and all nations supply her with the conveniences of life.
The Dutch were businessmen; the Spanish were gold miners. In modernity, the stock market reflects the efforts of businessman and entrepreneurs. Gold is simply an asset. Should we invest with the Dutch or the Spanish?
I’ll side with the Dutch. If we look at the S&P 500, which reflects the actions of businessmen, and the gold price, we see two assets appreciating, but one tends to appreciate more than the other. The S&P 500 is the one that tends to appreciate more over time.
|Annual Appreciation Rate||S&P 500||Gold|
|40-Year Average Annual Appreciation Rate||8.5%||5.0%|
|30-Year Average Annual Appreciation Rate||7.6%||3.4%|
|20-Year Average Annual Appreciation Rate||4.4%||7.3%|
|10-Year Average Annual Appreciation Rate||5.2%||3.0%|
|5-Year Average Annual Appreciation Rate||12.0%||(6.7%)|
I’ll concede that an investor would have realized more price appreciation buying gold 20 years ago and holding for 20 years. If your choice were limited to buying the S&P 500 or gold at the start of 1998, gold was the better choice.
But was it?
I overlooked a minor detail — dividends. The stocks that comprise the S&P 500 pay dividends, gold doesn’t.
Let’s go further back in time. If you had bought one share of the S&P 500 in January 1978, you would have paid roughly $90.25. By the end of 2016, you’d have collected $950.13 in total dividends on your $90.25 initial investment. You’d have collected 10 times your initial investment in dividends alone.
And if you’d have bought your S&P 500 share at the beginning of 1998, you would have paid $964 for your investment, but you would have collected $560 in dividends.
If all hell breaks loose, I want nothing to do with this world, so I have no need of gold. And if all hell doesn’t break loose? I still have no need of gold . . . except to use as money.