My stance on gold: learning from the pros

I used to have no opinion about gold as an investment asset. Then I came across this Warren Buffett quote:

[Gold] gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.

Thinking more, I came to the decision that investing in gold was a bad idea. I wrote 2 different blog posts declaring that gold was a bad investment (post 1 and post 2). Many months later, I hired a financial advisor, who recommended that I allocate 10% of my portfolio to gold. I told him that I wouldn’t hold gold, and I stood my ground.

A couple of years pass, and I discover the idea that the portfolio as a whole is more important than the individual components in the portfolio. I warmed up to the idea of having an allocation to gold, and I compared gold to spices such as bay leaf or star anise that are added to biryani. No one eats bay leaves on their own, but we all want bay leaves in our biryanis.

Image source: pickpik.com

I still didn’t like gold, but I was willing to add it to my portfolio because of what it brings to the table. I was still hesitant because gold is a speculative, non-productive asset. Then I came across the most complete write-up on gold I have ever seen: this is the memo that fund manager Howard Marks wrote to his clients in 2010, named All That Glitters.

I already knew that Howard Marks was not a fan of investing in gold, so I was expecting to see arguments against gold. I was also a bit nervous because if I am convinced by Howard Marks’ arguments, I may have to change my stance on gold once again. But that memo blew my mind. It was as rigorously seeking truth as an unbiased academic research paper would. Strangely, I am more at peace holding gold after reading the memo. (Confirmation bias, maybe?)

Here are the key points that I took from the memo:

• To profit from an investment, the question of intrinsic value may not be fully important. As long as we have other investors willing to buy the asset from us, we can make a profit.
• We call bonds and shares productive assets because they produce cash flow. But what is that cash? Cash is the fiat currency of some country. Do fiat currencies have intrinsic value? They don’t. They have value only because everyone agrees that they are valuable. Then how is gold different?
• Howard Marks’ investment framework requires knowing the intrinsic value of an asset and then buying it at a bargain price. For gold, no one knows what the intrinsic value is. Hence, Howard Marks cannot buy gold using his prudent methodology.

Gold is not compatible with Howard Marks’ strategy, but my investment strategy is a lot more passive, and I don’t usually care about valuations. That means I can buy gold according to my portfolio allocation without worrying about overpaying for it. (If I overpay, I’ll correct that mistake when I rebalance the portfolio next time.)

I still worry about a technological advancement making gold abundantly available and hence crashing its price. But I have grown a lot more comfortable giving allocation to gold in my portfolio.