market folly

Howard Marks of Oaktree Capital has been on a writing spree as of late. Yesterday we posted Howard Marks' thoughts on the credit cycle. Today, we turn our attention to his memo, 'All That Glitters' which focuses on everyone's favorite precious metal: gold.


Reasons to Own Gold

He starts off his missive by examining the reasons to own gold. He lists the following as pluses: "It serves as a reliable store of value, especially in challenging and uncertain times. It's a hedge against inflation, since its price rises in sympathy with the general level of prices. It exists without the involvement of man-made constructs such as governments. And it's desired and accepted all around the world (and always has been)."


Why You Shouldn't Own Gold

On the contrary, Marks provides equal weight to the other side of the argument. Citing reasons not to own gold, Marks prudently highlights that, "gold is nothing but a shiny metal. Since its real-world applications are limited to jewelry and electronics, very little of its value comes from actual usefulness.


Marks' Take on Gold

While he uses the first half of his letter to cohesively outline the arguments both for and against gold, he uses the latter half to focus on his personal view of the metal. Marks has a problem with the precious metal in that he can't properly value it. He writes, "But there's no analytical way, in my opinion, to value an asset that doesn't produce cash flow ... and especially one that doesn't at least have the prospect of doing so." On this he further opines that, "In fact, that's true of all non-income-producing assets: they're only worth what buyers will pay for them."

He then goes on to summarize his view by writing, "My point here is the one I've held longest on this topic: that gold works as a store of value solely because people agree it will." In the end, he used to be a non-believer in gold but has since come around to some of its merits. He primarily sees its use as "a useful contributor to safety through diversification."

Embedded below is Howard Marks' memo, 'All That Glitters':



You can download a .pdf here.

Toward the end of the letter, Marks focuses on the US dollar's weakness and its potential role in gold's strength. This is the exact premise John Paulson has used. Paulson & Co's gold fund is a bet against the US dollar.

Longtime readers of Market Folly know we have posted copious resources on the topic of gold, including viewpoints from many top hedge fund managers. And as you'll see below, the majority are proponents of the metal:

- David Einhorn stores physical gold

- Passport Capital's John Burbank prefers hard assets

- Dan Loeb buys physical gold

- Gold miners, not gold, are the play