Gold in shaky hands? - LEX

When all that glisters is not gold
Published: January 7 2011 10:32 | Last updated: January 7 2011 15:29
Charlie Munger, half of the brains trust at Berkshire Hathaway, recently said that his disdain for gold stems from the lack of rational reasons for “hoarding” it. “Even if it works, you’re a jerk.” Sour grapes? Not really. Berkshire shares have outperformed the yellow metal, and not only over the past year. Berkshire’s book value has grown 47 times as much as the gold price since 1971, when the US dropped the dollar link to gold at $35 an ounce.

Rationally or not, gold has outshone most assets this past decade. As the price rose, many new investors found reasons to buy. Those who fear currency debasement may be faithful, but those just along for the ride may feel unwell if it gets bumpy. It is hard to say how many fit each category, but some four-fifths of investors in the SPDRS Gold Trust (GLD), proud owner of 41m oz of gold – more than most central banks – have never owned gold before.

The trend at this leading vehicle for financial participation in gold should be a good indicator. The most recent trend is negative: GLD’s physical holdings have dropped back to levels last seen in June. Perhaps the market is saturated, or there could be some profit-taking by opportunistic holders. If so, it is a problem for goldbugs, who rarely fail to trumpet bullish supply and demand trends. When financial investors sell, someone else has to buy to keep the price from dropping. But jewellery and industrial users account for just half the market and demand from both groups seems to fall as the price rises. The precious metal bulls have to hope that dollars lose real value faster than gold investors run for the exits. That may or may not be what Mr Munger considers rational, but it still makes one a jerk.