February 16, 2012
By Andre Sharon
Probably more nonsense has been expended on discussions of gold than on any other investment vehicle. Including by me – until my eureka moment.
THE TWO EXTREMES
On one side are the true believers who become almost fanatical in their devotion. Incas waxed lyrical about gold, calling it “the tears of the sun.” Ancient Egyptians called it “the skin of the gods.” It has been coveted and sought after from time immemorial at practically any cost, including moral considerations. Lovers symbolically pledge their devotion with it, poets and musicians rhapsodize about it, and most people measure excellence by reference to it.
Gold’s detractors are equally passionate about it. Keynes called it a “barbarous relic.” Charlie Munger more succinctly called it “stupid.” In his latest letter to Berkshire Hathaway shareholders, Warren Buffett was equally dismissive, pointing out that “gold doesn’t produce anything.” He repeated the familiar observation that “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… Anyone watching from Mars would be scratching their head.”
Buffett’s observations are correct. Gold is unproductive. It pays no interest. You can’t eat or drink it. It may be beautiful, but its industrial uses are limited. It is difficult to value vis-a-vis other assets.
So why did I conclude that the Buffetts of the world, and even my hero Milton Friedman, are wrong with respect to gold?
ARRIVING AT A RESPECT FOR GOLD
In order to understand that question, you must know a bit about me. I am an economist, with a degree in Money and Banking from the London School of Economics. I know all about the gold and gold-exchange standards. I analyzed the gold mining industry from Canada to Australia, and descended into mines a mile deep in South Africa. I became thoroughly familiar with gold’s supply and demand components, and with the mines’ marginal cost and revenue curves. And like Keynes and Buffett, I pontificated eruditely but cluelessly on the subject of gold’s worth, while totally missing the core issue.
You see, all my education provided less insight than a single conversation I had many years later with the late Dr. Bernard Pacella, then President of the American Psychoanalytic Association. Though he was a quiet and modest man, in the course of our conversation, I soon understood that I was in the presence of an extraordinarily perceptive mind that could see around corners. By the time he was through, I felt that I understood gold for the first time in my life.