Is Gold a Good Long-Term Investment?

Here is my response to a friend’s comment that “gold is a good long-term investment”.
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I am not sure I would ever hold a commodity “forever” and I disagree vehemently with your statement that gold is a good “long-term” investment. The nature of commodities is that high prices ultimately choke off demand and/or result in increased supply. Gold seems to be in the sweet spot of the cycle since annual supply continues to decline (despite the higher prices) and demand remains very strong among investors and central banks. However, nothing suggests that this dynamic will last indefinitely.

Remember gold was in a secular decline from 1980 to 1999 so while it has risen a lot since 1999, it will come back down hard at some point. It could take 5-10 years (frankly, I have no idea), but there is little doubt that it could come crashing down. The near consensus global view forming around gold's preeminence as a store of value should only serve to spark your interest in how best to short it. There is still much skepticism around its recent run; as such it could continue going higher (hopefully, materially so since I remain long through the GLD and options on the GLD). However, there will come a time where even the most ardent skeptics throw in the towel and the most strident bulls bask in their fleeting fame as TV personalities (many of which are already coming to the fore). At that point, I hope I am smart enough to spot the cracks in the bull case. Usually, it’s the most levered buyers who serve as the canary in the coal mine. To the best of my knowledge (albeit limited), I don’t think the current bull market in gold is being driven by the leveraged speculator and so the “foolishness” that characterizes most bubbles has yet to surface.

Every time a speculative bubble gets underway, I always try and call the top and every time I am always way too early. However, without fail no matter how high things go they always end up materially lower than ever I thought possible. So my point is that even if gold goes to $2,000, $5,000 or whatever, once investors’ faith is restored in paper currency, gold will decline precipitously. It is hard to imagine a world where paper currency reclaims its spot as a favored store of wealth; then again, it’s always difficult being a contrarian when others are getting rich riding a speculative wave. While the comment that investors will one day come to value paper currency again seems asinine given the ubiquitous money printing and fiscal deficits being run by nearly every developed economy; I can assure you that asserting in 1999 that gold would breach the $1,000 level seemed equally as preposterous.

The only thing I would blindly hold forever is the equity of an excellent company. Give me an early stage Coke, Disney or Microsoft and I will give you every ounce of gold residing in my portfolio (no matter what the concerns surrounding inflation are). There is absolutely no better way to generate long-term wealth than buying and holding the stock of great companies residing in countries undergoing secular growth. No matter how high gold goes, nothing will shake my conviction that equities remain a far superior long-term investment.