The Case Against Gold: More Expensive Than Paper, Not More Valuable

Last Updated Nov 26, 2010 12:54 PM EST

Gold is up about 25 percent so far in 2010, compared to 7 percent or so for the Standard & Poor's 500-stock index or the Lehman Bond Composite Index.

Gold has been a stellar performer not just for the last year but for the last decade, in which it has risen more than fivefold. The continuing strength makes commentators who expected a decline in the metal (me, for instance) look foolish, but at least we bears are in good company. Jeremy Grantham, chief investment strategist of the fund manager GMO, took time out from his Fed-bashing in his latest quarterly newsletter to make the case against gold.

While advocates like to highlight the differences between gold and paper money, Grantham elegantly points out a key similarity - that neither has any significant intrinsic value. Paper currencies may only be worth what naïve true believers are willing to pay for them, but that applies to gold itself, he says:

"Everyone asks about gold. This is the irony: Just as . . . we all have faith-based paper currencies backed by nothing, it is equally fair to say that gold is a faith-based metal. It pays no dividend, cannot be eaten and is mostly used for nothing more useful than jewelry. I would say that anything of which 75 percent sits idly and expensively in bank vaults is, as a measure of value, only one step up from the Polynesian islands that attached value to certain well-known large rocks that were traded. But only one step up. I own some personally, but really more for amusement and speculation than for serious investing. It may well work and it may not. In the longer run, I believe that resources in the ground, forestry, agriculture, common stocks and even real estate are more certain to resist any inflation or paper currency crisis than is gold."
Grantham has a point. Real estate has a tangible value, even if prices are in the dumps these days. Stocks similarly represent pieces of (mostly) profitable businesses that produce goods and services with (mostly) tangible value.

The last decade is an anomaly for gold. Over the very long haul, it has failed to match the performance of every other major asset class. So while owners of gold may disdain paper money, they may come to wish that they had exchanged their hoard for the large amount of paper that they can get for it today.