A few years ago, I detailed Why this jerk holds a little gold. It represents less than 1% of my portfolio, so it’s a shiny sideshow not an important holding. But here's the argument regardless.
My argument for gold is not as an alternative to long-term assets like shares (which form the bulk of my portfolio), but as a diversified liquid asset; an alternative to cash.
Gold is subject to some significant and important unknowns—production, demand (investment and jewellery), central bank purchases/sales, as well as the perennial argument about its lack of yield. But so too is cash—chiefly the rate of interest it earns and its tendency to multiple by way of printing press.
Gold is beholden to different unknowns, and so the concept of diversification of my liquid assets makes some sense to me, ergo a little gold. That's the theoretical argument although, in practice, I don't hold enough to make much difference.
At last Thursday’s An evening with Intelligent Investor (I’ve linked to the Wednesday event, unfortunately we didn’t record the Thursday event), special guest Kerr Neilson was asked by several audience members for his views on gold. Paraphrasing, he said that gold is for nutters only, and that he is a nutter.
But then he said how platinum might be an interesting alternative (we’re talking about the metal here, not his funds management business).
The argument for platinum, as outlined by Neilson, is that it’s mostly mined in South Africa and Russia, which are both politically difficult.
The mines in South Africa (accounting for roughly 80% of global production according to wikipedia) are now getting very deep (about 4kms down for some newer mines) and are becoming structurally more problematic. As a result, the all-in cost of production is high—probably within earshot of the current price for the metal (which is about US$1,550 per ounce).
I’ve kept a loose eye on the metal ever since Neilson discussed it at a Platinum Asset Management or Platinum Capital annual meeting a few years back in response to my query, where I asked him to detail some of the great opportunities of the GFC.
My memory isn’t perfect, but he said something along the lines of platinum below $1,000 (it got below US$800/oz in 2008) was an unusually attractive lay down, because it was a well below the cost of production. The argument today is less compelling, but perhaps still interesting.
Platinum, like gold, might be inert. But it’s not useless and thus may have more genuine ‘intrinsic value’ than gold, which tends to laze around in bank vaults for the most part. Platinum has quite a few important industrial uses, such as in catalytic converters.
Also, it’s interesting to note that platinum is currently cheaper per ounce than gold. This may be a function of the high gold price rather than a low platinum price, but it is certainly not the normal state of affairs.
As recently as early 2008, platinum was twice as expensive per ounce as gold. Platinum has only been cheaper than gold on a few short occasions in the past forty years (mid 70s, ’82, ’85 and today).
Don’t take this as investment advice, I really have no idea if platinum is currently cheap, nor any idea where it might head next. I have no inkling of how usage of the metal might expand or contract in the coming years (if you have thoughts, please share them below).
But, if you’re a nutter anyway and are already looking at precious metals, platinum might be worth a look too.