December 10, 2010 – Academia has an overarching need to fit everything into neat little compartments and that has engendered endless debate over how to classify gold bullion investments. It all starts with the notion that investments must fall into two categories: those whose purpose is to provide income and those intended to generate profit.
One common contention is that all profit seeking investments are necessarily speculative and therefore are not investments at all. That glaring non sequitur is based on the assumption that all speculative investment is only gambling while investing in interest bearing instruments, hoping that the interest will outpace inflation, is not.
There is an element risk in every investment, and therefore all are gambling to some degree. The gold bullion market sheds light on the gamut of risk takers.
Because gold produces no returns, income investors usually hold very weak positions in bullion. However, when traditional instrument rates fall low enough the cost of holding bullion diminishes and they take stronger positions. The turn around can happen in days, as it did with Bernanke’s announcement of the possible expanding QE2. At first Treasuries shot upward and income investors backed out of gold, but they returned a few days later as Treasuries again declined.
Other short position investors buy gold bullion to shield against what they believe to be temporary adverse movements in the economy expecting that current trends will sustain growth in their portfolios. And of course, there are the true speculators hoping to capitalize on the very short term movement in gold bullion prices.
But gold bullion shines brightest in long positions, where it fills a vital niche: stabilizing investment portfolios and providing insurance against failure in other assets. There may not be a pigeon hole for that, but gold bullion will always be a wise investment.
