Why Gold?

Because it’s a value game.

The investor seeks value, the speculator seeks growth. The investor looks to protect his capital and only then appreciate it. The speculator looks to offset the possibility of loss by the probability for profit. I think that sums up the divide on Wall St.

An investor by default has always been a bond holder. Only in specific cases would he forfeit ultimate safety for a possibility of sure profits, with the only risk being a loss of real asset value before share appreciation.

Why not gold?
There are a few reasons why Graham and Dodd may have not chosen gold specifically. It should be noted that he does point to the holding of real assets (such as real estate, commodities) in times of inflation, but also notes that such times are only temporary.

I must say I’m not sure I entirely agree with Graham on this one. He seems to be making the same assumption that speculators make when buying for growth: Timing and Severity.

How could one properly assume the exact proportionate dynamics and duration of a devaluation? What if the book was published after Hitler defaulted on Germany’s outstanding debt, wiping out bond-holders completely? Or after the Bolivian crisis, the Argentinian debacle or even the 1970s?

Even in The Intelligent Investor, which he revised many times before his death in 1974, he makes little note of extra-equity purchases, and here may be why.

We must remember that gold was the backing of almost every currency in the modern world. Even those who had no gold had their currencies pegged to those who did. Graham never lived out the 1970s. If he would, he may have been a lot more of a gold advocate in times when both stock investment and bond investment turn inadequate, because of a deteriorating business environment and currency inflation.

Graham would never see the day when people were lining up to buy gold as U.S. Bonds plummeted and interest rates soared to unprecedented levels. I don’t think he could ever imagine an industrialized world of free-trade and globalized commerce, permeated by capitalism, but backed solely by fiat-currency.

Owning what you have
Wealth preservation is a matter of necessity for the investor, for even if he lives in times of uncertainty he knows that sooner or later opportunities will arise and that he must not be broke when those times come.

Why would he buy stocks today that sell just above 15 times earnings and 1.5 times book value, with no attractive dividend to offer? Where has his margin of safety gone?

Indeed, today I believe that the investor should be by default a gold “hoarder”, and at most an ultra conservative bond holder of strong, asset backed nations.

On Warren Buffett
Buffett may be buying, but he has been wrong before (interestingly enough with preferred shares of questionably solvent company, U.S. Airways). He saw his portfolio down almost 60% in the 70s. Sure he knows what his doing but most people don’t. They don’t share his knack for opportunity, his 57 years experience, his patience and most important his knowledge of when to sell.

Buffett has been known to have short interval in-and-out trades. He bought preferred shares of Goldman Sachs at 115 with a 10% yield. If he holds until year end, without further appreciation he would have netted 17%. Not bad!

Investors, whether gold-backed or bond-insured, need to be enticed to exchange their holdings for shares. An opportunity so full of protection and profit that they can’t help but buy. We live in such times yet and unfortunately buy-and-hold theorists may have a lot to learn before we do.

Like many advocate, Gold is not an investment. It is an asset. You don’t invest in assets. Traders exchange them. Businesspeople develop them. Investors hold them until a better option arises.

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