Why I don't own gold...Investing vs. Speculating by Seth Klarman
As I mentioned a while ago, I recently bought a new Kindle from Amazon.com. It's a very impressive device, though I must say the print is a little on the small side...at least on .pdf documents that weren't designed for it, like the one that I am reading right now.
Yesterday I started reading the famous value investing book "Margin of Safety" by Seth Klarman. While the book is technically out of print, one can find .pdf copies of it all over the Internet. I am on a particularly interesting chapter of the book right now that talks about the difference between investing and speculating and it got me thinking about gold and why I don't currently own any.
I'll be the first to admit that I have obviously missed out on some serious gains by not investing in gold thus far and the metal hits new highs day after day. I certainly can understand why one would think that with interest rates so low and governments printing money that we will see significant inflation. Still, gold doesn't generate any real income. The only way to make money on it is to find someone who is willing to pay you more for it than you paid. Unless his views on this subject have changed since he published "Margin of Safety" Klarman would call buying gold speculation, not investing.
Here's what he has to say on the subject:
"...assets and securities can often be characterized as either investments or speculations. The distinction is not clear to most people. Both investments and speculations can be bought and sold. Both typically fluctuate in price and can thus appear to generate investment returns. But there is one crucial difference: investments throw off cash flow for the benefit of the owners; speculations do not. The return to the owners of speculations depends exclusively on the vagaries of the resale market.
The greedy tendency to want to own anything that has recently been rising in price lures many people into purchasing speculations. Stocks and bonds go up and down in price, as do Monets and Mickey Mantle rookie cards, but there should be no confustion as to which are the true investments...
Investments, even very long-term investments like newly planted timber properties, will eventually throw off cash flow. A machine makes widgets that are marketed, a building is occupied by tenants who pay rent, and trees on a timber property are eventually harvested and sold. By contract, collectibles [and precious metals I might add] throw off no cash flow; the only cash they can generate is from their eventual sale. The future buyer is likewise dependent on his or her own prospects for resale."
Anyhow, I'm not saying that gold is going to crash or that others are wrong for purchasing it. Heck it could soar to $2,000 or more next year. I'm just saying that for me, I prefer to purchase businesses that generate cash, hopefully increasing amounts of it over time. If we end up seeing inflation, the value of stocks in general should benefit anyhow.
That's my $0.02 for the day.