True Gold Bugs Care About Value, Not Price

London (July 29)  The price of gold has fallen by almost half since it reached nearly $2,000 per ounce four years ago -- that was a sixfold increase from 1999. In the past year alone, the precious metal has dropped more than 15 percent. But there's good reason that Tim Price, who owns the yellow stuff on behalf of the clients at PFP Asset Management in London, couldn't care less.

Quicktake The Rise and Fall of Gold

Here's a chart showing the price performance in dollars of gold in the past two decades:

Central bankers claim they aren't interested in gold anymore. At a 2011 Congressional hearing, then Federal Reserve Chairman Ben Bernanke dismissed the practice of central banks owning gold as a "long-term tradition." Two years later, he had this to say:

Nobody really understands gold prices and I don’t pretend to really understand them either.

In the years since the economist and investor John Maynard Keynes dismissed pegging currencies to the asset as a "barbarous relic," the arguments against gold have been well rehearsed: It pays no interest (though you can make a return by lending it out for a fee); it has almost no real-world industrial uses that would justify digging yet more of it out of the ground; and its ups and downs seem to depend more on the vagaries of fashion and jewelry-making than with anything a trader or investor could model in a spreadsheet or predict with an algorithm.

That latter characteristic, however, is precisely the point. Here's how Price at PFP explains his affinity with gold:

We ourselves regard gold as a monetary metal, an alternative currency and a store of value – over a period perhaps best described as ‘the medium term.’ It is not an investment but a conscious decision to refrain from investing. Gold, in other words, is the part of the portfolio that isn’t "in the market," so to speak.

In an investment world where asset prices have more to do with central bank manipulations than the underlying economy, gold has a role to play. Its movements may be unpredictable, but at least its value appears to move freely depending on the whims of its buyers and sellers, rather than on the interventions of policy makers.

To see how the price-information component of financial markets has been destroyed, witness the recent negative-yield experience of European debt. The prospect that the European Central Bank would buy 60 billion euros ($66 billion) of securities every month meant that investors were willing to pay to store their money in government bonds. Even more recently, Chinese stock prices have plummeted as the authorities there have tried to prop up the market.

Gold has something in common with Bitcoin. Supporters of digital currencies and the blockchain technology that underpins them should be indifferent to whether Bitcoin trades at $100 (as it did a year ago) or $50 (as it does today). Just as gold is about value, not price, virtual currencies should be about what technology can do to update the world of finance, and should not be seen as a way to make (or lose) a quick buck.

For gold, the worst might not be over. It currently trades at a bit less than $1,100 per ounce, and it's expected to drop to $984 before January, according to the average estimate in a Bloomberg News survey of 16 analysts and traders. But to someone who appreciates the role that gold bullion, bars and coins can play in an investment portfolio, that shouldn't matter.

Source: Bloomberg