A lot of investors have become gold bugs recently. This is understandable given the instability in global financial markets and with the risk of inflation as the US and other G20 countries take on massive debt. Smart friends of mine are buying gold as a hedge against inflation while the US prints money. The US national debt is about 13 trillion dollars, more info here.
After the housing meltdown and recent stock market volatility it’s natural for capital to go to safe places like gold and treasuries. However, there are some cogent counter points to this strategy that I feel aren’t being voiced enough by the media nor by people who manage money.
Some reasons not to buy gold: Gold will hedge against inflation but won’t pay a premium to it. It will track inflation, but won’t give you a premium over it. Gold is a shiny metal with limited industrial uses. Its value is based on history, civilizations have valued it for millennia based on a primitive attraction to the material itself. Gold is atomic, and you know what it is, but therein lies the rub: Gold doesn’t represent any kind of innovation, it doesn’t represent imagination, it doesn’t help health, nor productivity, nor innovation. It’s bad for the environment. Mercury, arsenic, acid water, and deforestation are some by-products of mining for gold. I flew over the Amazon rainforest in Peru recently and looked at the destruction from large scale gold mining and even artisanal mines that dot the landscape.
Take a look at all the innovation happening today — Tesla has produced a beautiful 100% electric car. The cost of mapping the human genome has gone from $3 billion ten years ago to thousands today. Moore’s Law continues unabated and the rate of innovation in smart phones is staggering. The computer has moved from the desktop to the pocket, this trend alone reminds me of the World Wide Web in 1994. Social networking is in its infancy, and Twitter and Facebook are growing explosively. IP traffic is growing so fast that it has stunned the pioneering people who helped create it.
Ray Kurzweil maps out an optimistic view of the future with a tremendous amount of data supporting his main thesis — that the rate of innovation is increasing on a geometric scale. This means that innovation is happening faster every day. So yes, there are macro-level concerns about the economy, but there is also a staggering amount of data that supports the case for being an optimist. The data supports the fact that we’ll see more innovation in the next ten years than we’ve seen in the last one hundred years.
If you are an investor or entrepreneur, this is the best time in history to make a fortune and create a better world. There are more opportunities now than there have ever been. Information and data are being democratized in a way that present opportunities for anyone with a computer and an internet connection. Markets are global. You can reach the world with your blog. You can influence politics, voice your opinion. You can even email people like Steve Jobs directly.
There is no time in history like now. So if you’ve run out of ideas, buy gold. But I argue this is the best time to find innovators and invest in the future. Fortune favors the bold.
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Gold is a troublesome investment. It is sterile capital that cannot be lent out and so is not additive to growth and investment. It is, as it has been over pretty much any long term period over the past few thousand years, a store of value.
Unfortunately, paper currencies have not, and, with the borrow-and-spend approach of entitlement burdened economies, it looks like this will continue. The ZIRP (zero interest rate policies) of Japan have spread to the US and other developed economies forcing savers out of money markets and CD’s and into riskier assets. They have also forced people into feeling uncertain about values and what investments they can rely on – all seem to be “as safe as houses”. Gold also have the advantage of being portable and bearer – an increasingly rare set of attributes in this increasingly digital world. At the same time central banks have moved from net sellers to net buyers, especially in the BRICs and other emerging markets. In fact, if you consider gold to be an emblem of stability and wealth gold moved from Europe to the US as a result of the world wars and now is moving to Asia and other emerging economies. Thus the demand for gold.
As an entrepreneur I much prefer investing in start ups that can change the world making the place better, than sinking it into a piece of metal that sits collecting dust in a safe deposit box. But I can understand those that go for the latter – after all they have been right for the past eight years. At some point they will be wrong, very wrong, I am just not sure when. In the interim, I see great companies every day that validate your perspective – bold over gold.
AMEN brother!
Check out Ray’s prediction for the future
http://en.wikipedia.org/wiki/The_Singularity_Is_Near
“bold over gold.” I love it, John.
Thomas – you’re so right to point out that gold’s value is rooted in history. It doesn’t innately create any value (through innovation).
Innovation creates new value and smart investors can make bets on the value created by startups and the like.
Great post.
I completly agree, buy gold in this time is the worst thing to do.
Invest on start up, internet projetcs and new technology is the best way to x100 you money.
It is what i do actually, i invest in aladin-consulting.com that is going to revolve the online worldwide Real Estate market.
Your point is well made. I’ve written quite a bit about this in my innovation blog (www.bransonpowers.com), but it is refreshing to hear your approach to innovation and investing. Your take on gold in particular I found to be provocative given the current environment. Never have we seen this level of innovation and change. I suspect that even if our economy avoided the worst of this current downturn that gold would still do pretty well – not because of any intrinsic value, but because it often functions as a charm against fear. Innovation and change, by its very nature is threatening to the status quo and to the individuals who have something to lose. Most people are frightened of change, and will grasp for anything to protect them from that change. It may be debated that gold can be a hedge against inflation, but it is most certainly an emotional hedge against change.
This was most dramatically illustrated in the biblical story of Moses, when his followers created a golden calf to worship when they were frightened of the profoud changes in their lives and wantedto to return to another time in their lives, even if it meant a primitive bondage to the rulers of Egypt. The golden calf is an important and apt metaphor for current gold bug investors.
There is certainly plenty of reasons to be optimistic about innovation trumping worries about our current economic situation. I might even hazard to suggest that the recession is itself a driver of the innovation and rapid growth of the future. It’s almost as if we need an economic downturn to help change people’s viewpoints and behaviors enough to accept new ideas, new products and new markets. Recessions are the nursery of the future.
General Electric created entire industries that didn’t exist before – even though it started during the financial panic of 1873. Hewlett-Packard started during the great depression, but created technology that helped to win wars and build entire industries. During a recession in the late fifties, Jim Henson transformed puppetry and in the process created a massive global entertainment platform while Hyatt Hotels began to build a global portfolio of hotels. Microsoft and Apple were started during a time (the 1970′s) when multiple recessions had convinced most experts that American business was no longer able to grow. Fortunately, those experts were wrong – in great part, thanks to the innovations of personal computers and the Internet. Apple is growing by leaps and bounds during the worst recession since the 1930′s.
There are many reasons for a recession to happen, but whenever an economy is in one, the rules for success change dramatically. Capital becomes scarce, raw materials unreliable, customers reluctant to buy. What was easy before suddenly becomes more complicated. Products that everyone had to have at any price before, suddenly lose their value. But as long as there are still people living their lives, there are ways to create something they need, want and will pay for – it just might be a little different than it was before.
As an example, in 2008, innovative on-line retailer Amazon had a 28% increase in net income. At the same time, retailers that did not innovate such as Circuit City faced diminished market share, lost sales and even bankruptcy.
Companies that perceive and understand the new rules in a recession are able to innovate and thrive, while those that continue as they did before risk losing everything. Buying gold may be the most dangerous investment one could make, somewhat akin to buying Circuit City Stock in 2007. During a recession, the most dangerous strategy is to avoid innovation.
It’s times like these that the imperative for every investor, every leader, every manager must be to challenge all assumptions from the past. Every process, every service, every product must be looked at from a fresh perspective – and changed to fit the new reality.
This is a brilliant article. I fully agree and it is really encouraging to read “If you are an investor or entrepreneur, this is the best time in history to make a fortune and create a better world.” – I am very excited to be a part of this fast-paced technological advancement in history.
Very interesting and insightful. I would, however, add the following:
If you truly believe the Kurzweil time path (I do not), then we will essentially be living in virtual reality by 2029, about 20 years from now, we will be able to upload our minds into computers in 25 years and so on (see: http://en.wikipedia.org/wiki/Predictions_made_by_Ray_Kurzweil#2020). In this world, money has no value, resources are infinite etc..
I don’t think this is likely to happen for the following reasons:
1. many such predictions have been completely wrong in the past. When I was a grad student at Stanford (25 years ago), people were making similar claims about artificial intelligence. Thinking computers are still just as far off as in 1985.
2. while it is conceivable that *some* people might enjoy this technological level by 2029, *most* will not. Slums in India, extreme poverty in Africa, and illiteracy and racism in the US — just to name a few examples — are not going away. The infrastructure of London is 150 years old. It cannot and will not be replaced in 30 years. Londoners will still take the tube in 2029. New Yorkers will still take the subway. We will still be running out of room in major cities — and people will be living in substandard conditions — regardless of the new Tesla, bioengineering, nanotechnology, or a new type of social networking.
3. as you point out, we are rapidly destroying our own ecosystem. Technology can’t save us here. We need behavior modification, legal and political will to change (very difficult) — but chances are these wont happen. With a hotter, more inhospitable world, I wonder if all we can expect from technology is to maintain the status quo.
The choice between gold and technology is not really a correct one. Its gold versus paper currencies and debt. As a friend of mine points out
“equity investments in great technologies will create great fortunes. gold is a form of money which cannot be easily manipulated by governments, and certainly cant be printed. it is a STORE OF VALUE. it is not an equity, and certainly has zero growth potential. it also has zero offsetting liability, and will be around long after Tesla is no longer footnote in the history books.”
Nice post….. “There are data to support we’ll be seeing more innovation in the next ten years than the last 100″ Here is how this relates to the Personal Medicine Platform… The Computer has moved to the Pocket, Web and Social Networking are growing explosively…” The opportunity for a true disruptive cost curve for primary care physicians is upon us now, with the Patient Health Record, Telemedicine, and Mobile Computing technologies at the center of patient care, rather than as an add on to a broken existing practice model. We are thrilled to have our physicians testing and tinkering our platform now on the ipad/iphone now as they deliver on demand healthcare at the bedside and through modern communications.
Here is a nice post on Disruptive Innovation and Customer Development in Healthcare…
http://personalmedicine.posterous.com/natalie-hodge-md-faap-innovation-in-primary-c-2
Natalie Hodge MD FAAP
http://www.personalmedicine.com
Totally agree. Great post, thank you. The best day to innovate is between yesterday and tomorrow. Gold is boring, doesn’t bring any dividend and does nto even guarantee a capital gains. ‘Bold’, on the other hand, is fun, exciting, makes the world a better place and is potentially much more lucrative.