Gold has been soaring, and that has caught the attention of a lot of people. If you’ve been following me, you’ll know the metal’s sharp rise hasn’t surprised me. In my investment publications and other forums, I’ve consistently/insistently urged readers to take substantial stakes in gold (along with silver, which also has been surging). And I’ve repeatedly detailed the reasons for believing gold was the single most important investment to own, pointing to gold’s unique qualities in the context of a world undergoing tectonic geopolitical shifts.
It occurred to me, though, that it could be useful to discuss gold’s special qualities in terms of a concept I’ve frequently applied when recommending equities: as a “franchise” (one of Warren Buffett’s favorite investment considerations). A franchise refers to a company that, without being an actual monopoly, has special characteristics that make it nearly immune to competition. A related and even more familiar term is “brand.”
Gold can be seen as a franchise or brand without peer, one that will never fall into obsolescence or be overtaken by a competitor. It is a more enduring franchise than any other you could name. For that reason, I am dubbing it a “transcendent” brand, in contrast to all other brands, which I’ll call “fragile” brands.
So what is the difference? A fragile brand is tied to the economy at a particular point in time. Take Apple, for example. It’s clearly one of the largest brands in the U.S., and it may seem odd to call it “fragile.” After all, from a certain perspective, it’s a very strong brand, giving it immense advantages. Buffett would argue there’s a moat around Apple, with multitudes of Apple aficionados rushing to scoop up the many related products in Apple’s ecosystem and eager to keep up with the latest iterations. The Apple Watch syncs to the iPhone, which syncs to the iPad, which syncs to the MacBook. It’s far easier to airdrop a file than to save a file, create an email, add it as an attachment and send it off. Once you get started with Apple, you’re happily hooked.
The ongoing triumphs of new Apple products are self-reinforcing, continually cementing the company’s well-deserved reputation for quality and service and leading to ongoing success and growth. For many fans, having the latest Apple product has become almost a badge of honor; they aren’t willing to shed a brand with such aura and prestige attached to it, to be the lone green message in a sea of blue (i.e., if your text message arrives in green, everyone instantly knows you aren’t using an iPhone). Moreover, the greater the number of Apple products in circulation, the greater the demand for servicing those products, further benefiting the company.
But the thing is, it is almost inevitable that technology will continue to evolve. At some point, a “better” Apple will overtake the brand. This may even be happening now, in some markets, with Huawei. Eventually a better, cheaper phone will come along, and the Apple offering will become outmoded.
That will never happen with gold. The crucial difference is that gold is not tied to technology (or to be precise, if it is, it is to a very small extent in the context of the amount of gold that can be mined within a year).
Bitcoin and oil
Could Bitcoin be considered a transcendent brand? It doesn’t meet the test: Just like Apple, it is technology-dependent. All of those crypto coins are fragile in that if you discover a way to crack the codes, they can be stolen and recreated, becoming monetarily irrelevant. We don’t know how close we are to being able to use quantum computers for that purpose, but we know that the Chinese are very advanced. Once quantum computation can be used for this, Bitcoin’s brand power won’t be merely fragile, it will be shattered.
What about oil and other critical commodities? Are they transcendent brands? While many commodities have been around for hundreds, even thousands of years, all are subject to competition. In today’s world the race is on to shift to renewable energy sources like wind, solar, and nuclear. I don’t mean to downplay the importance of oil, which is a vital commodity. In a prior blog about Venezuela, I raised the possibility that working in concert with China, the U.S. might be able to produce enough oil to significantly add to our strategic reserves, letting us use “black gold” to back up our dollar. If you have enough oil on hand, you can guarantee the dollar, because you can always find legitimate uses for oil. But the difference between black gold and gold is that someday we’ll run out of oil, while we won’t run out of gold. Moreover, the amount of oil on hand always will depend on economic activity. When oil becomes less critical to the world—a development that is vital for the world having any sort of viable future—it will be worth less. It is that inevitable weakening in oil’s brand that prevents it from being considered transcendent.
While gold is transcendent, there are aspects to it that are fragile. If we were simply talking about gold in its role as an industrial commodity, it clearly would be a fragile brand, because its industrial role is minor, and other metals can step in as substitutes.
Gold’s transcendence is grounded in its collection of unmatched physical characteristics. I’ll start with the fact that to the human eye, gold has always, throughout the centuries and throughout different cultures, been seen as inherently beautiful. In fact, it is the only thing that is valued simply because of its intrinsic beauty. That beauty is inextinguishable, which helps explain why gold is used in spiritual settings across the globe. Almost every religion has icons made of gold, which are revered not for their monetary value but for their beauty. The Chinese wear two colors on their New Year: gold and red, with gold symbolizing the heavens. China may be a lot of things, but it is still a culture that has been around for several thousand years and that has a deep spiritual foundation.
Gold vs. silver
Gold’s physical characteristics are exceptional. No one has any idea how gold was created. Its atom has a very small radius, and a single electron orbits the outer shell. It is that single electron that accounts for gold’s glow and its beauty.
The small atomic radius is partially responsible for how malleable and ductile gold is. You can stretch an ounce of gold into a wire approximately 50 miles (or 80 km) long. Or you could hammer it into a translucent sheet covering 300 square feet. Yet somehow, despite these remarkable characteristics, gold doesn’t have any essential industrial uses. Gold, specifically nanogold, does have applications in medicine, and gold is certainly used in industry, but that accounts for only about 10% of gold, and there are substitutes for those uses. By contrast, silver is an unparalleled thermal and electrical conductor, and copper has critical uses. Both silver and copper also are ready substitutes for gold. Ironically, silver’s vital role in industry helps explain why it isn’t viewed as a permanent monetary center: Its connection to industry makes it far more volatile than gold and therefore less suitable for a monetary role. Silver is the element that comes closest to gold, and as noted above I strongly recommend it as an investment, but all things considered, its franchise value, while significant, is still markedly less than that of gold, which stands alone.
Continuing: Gold can’t be destroyed. The closest you can come is to change its state. Last century, French Olympians dissolved their gold medals to prevent the Nazis from confiscating them and after the war, the medals were reconstituted. The National Mining Association says that all the gold that has ever been mined is still around. You can’t destroy gold and it will never run out. You can’t say that about any other commodity.
In the U.S., there are states where gold can be used as a means of trade and commerce. Oklahoma, Utah, Louisiana, Texas, Florida, Missouri, Arkansas, Arizona, Wyoming, Idaho, Kansas, West Virginia, Tennessee, Alabama, and South Carolina all accept gold and silver as legal tender. While businesses are not always required to accept them, laws in these states aim to remove current impediments and create frameworks to use precious metals for payments. This is important because, at the end of the day, we are material beings, and we have to have a way of transacting with each other.
To sum up: Nothing compares to gold and that, in and of itself, is a characteristic of beauty that is not found in any other element. Gold makes for a bridge between the material and the spiritual world. It’s a transcendent brand unlike anything else.
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