Those who own gold often argue how to best own it. I encourage anyone holding gold to assess the pros and cons of different choices of gold ownership to make an educated rather than emotional decision. Let me explain.

I commissioned the above cartoon back in 2011 in response to an assertion by CNBC’s Steve Liesman no one would accept a gold coin in a grocery store. My take was that, hell, if I offered a gold coin, I’m pretty sure I would find a taker if I wanted to exchange it for some groceries.

There appears to be an eternal back and forth between those that “love” and those that “hate” gold; that discussion, in my humble opinion, misses the point. It is striking how this shiny metal raises emotions by both friends and foes. Maybe it is because gold is so simple, so pure, the fact that there are fairly few industrial uses for it, that emotions take over in discussing gold’s merits.

The historic context matters. Gold has been used as money for millennia; yet some say it is a “barbaric relic” preferring to use fiat currencies for commerce. All major currencies are fiat currencies these days, that is, they can be created ‘out of thin air’, by the stroke of a keyboard at a central bank. The modern world of fiat currencies, is in place in its current form since 1971 when Nixon ‘temporarily’ abandoned the last link to gold. The very notion of currency has been used in new ways as promoters of virtual tokens subject to a decentralized creation and sharing methodology referred to as crypto-currencies have touted that they will disrupt the way we transaction and store value. The value of crypto-currencies, of course, has been highly volatile, and none of this should be construed as an investment recommendation. Crypto-currencies, in my humble opinion, are as much of a currency as anything one can trade. Indeed, when a publicly traded company acquires another firm, management offers their share prices as a currency.

One might be excused to think that a currency is something with a stable value. Scanning through my past writings, I see references as far back as 2008 where I argue that there may be no such thing anymore as a “safe” asset, and that the U.S. dollar may have lost its function as a store of value. Indeed, I have argued in the past and still believe, one can construct a portfolio without a safe asset, as in modern portfolio theory. In this context, it may be a petty contest to argue one thing is a better currency than something else. Yet I would think all these so-called currencies are different in various respects.

Gold is often criticized for not generating income. However, your twenty-dollar bill in your wallet doesn’t generate income either. When you deposit $20 in your bank account, you might earn an income, but note that you’ve converted your twenty-dollar bill, a liability of the Federal Reserve, into a loan to the bank. Differently said, you are putting your $20 at risk. With FDIC insurance, that notion of risk gets socialized (meaning the government guarantees FDIC insured deposits), but the concept holds, especially when deposits are large. Similarly, you can earn an income with gold by leasing it out, i.e. putting it at risk. That’s because when you lend someone gold (and presumably earn an income for doing so), you risk that the counterparty won’t be able to return the gold back to you at the agreed time.

That said, what attracts many to gold is that, in the words of former Federal Reserve Chairman Greenspan: “Gold has always been accepted without reference to any other guarantee.” More broadly, because gold in itself is not the obligation of anyone else, it is not considered to have counterparty risk; counterparty risk, of course, is the risk that a party to a contract won’t live up to its contractual obligation. While gold is “consumed” by jewelry demand, it is indestructible. The price of gold, just like anything else, is subject to the forces of supply and demand. Yet I would argue that those supply/demand dynamics are simpler than those of many other assets, especially those generating income. The fact that gold doesn’t have inherent cash flow also makes it a natural diversifier to be considered in a portfolio to assets that do have a cash flow. That’s because when volatility rises, future cash flows may be discounted more; as a result, in my analysis, since 1970, the price of gold has historically outperformed risk assets in bear markets (defined as 20% declines from a market top) in the stock market (a notable exception was the early 1980s when the price of gold declined as then Fed Chair Paul Volcker increased interest rates substantially):

After a nine-year bull market, those who have taken precautions against a market decline are often ridiculed; how ‘dumb’ they must be that they weren’t fully invested. With due respect, this is a bunch of garbage. Investing isn’t about beating an index, it is about managing one’s savings in the context of one’s objectives. And if you are more comfortable to have safety in the form of x, y or z, no matter what that may be, then that is as important as some computer model that suggests a different form of investment should yield a given return.