Since You Asked

Can Spam ever be better than gold?

“Can you eat gold? No. You can eat and barter Spam”

– Nouriel Roubini, economist, Dec 14 2011

An intriguing remark, that.

It calls to mind one of the jokes that was circulating during the post-Lehman panic of 2008: “Normally the pessimists buy gold; these days, the optimists are buying gold and the pessimists are buying bottled water and bullets.”

Prof Roubini is one of the pessimists?

He is famous for his apocalyptic economic forecasts, the gist of which has been borne out in the past four years. This isn’t the first time he’s pointed to the logic of canned goods in the worst of economic times.

Well, he’s right: you can’t eat gold.

That was a problem for King Midas, but I think that’s a distraction. You can’t eat bank statements or share certificates. I think what Prof Roubini is really suggesting is that gold isn’t necessarily the best financial investment.

And is it?

Forecasting is for the likes of Prof Roubini. All I can do is point you to past performance and make the observation that it’s no guarantee of future performance. Over the past 40 years or so, the value of gold has been negatively correlated with the value of other assets, making it useful for diversification. Gold was subject to a speculative bubble in the late 1970s and, after adjusting for US inflation, reached a long-standing peak in 1980. Gold proceeded to be an abysmal investment for the rest of the century, but has been booming again more recently. Despite a recent slump, gold has still outperformed the US stock market over the past decade. But what does that tell you, unless you have a time machine?

Surely you can say something about fundamentals?

Not really. When it comes to bonds you can make judgments about inflation and the probability of the money being repaid; with shares, it’s helpful to look at corporate profits. Gold has some industrial and cosmetic uses, but its value to gold investors is that there will always be another investor willing to buy. Because the value of gold is almost entirely tied to future investors’ willingness to buy it, strictly speaking, gold has been in an investment bubble for the past 3,000 or 4,000 years. But there’s the rub: if the bubble has lasted as long as civilisation itself, “bubble” is hardly a derogatory term.

Why do people get so excited about gold?

There’s a particular economic philosophy at work here – the view that government-issued paper money cannot be trustworthy and that currencies should be firmly backed by gold. Presumably the gold enthusiasts have never encountered the Bundesbank. Philip Coggan, author of Paper Promises, points out that there has long been a conflict of interest between creditors, who like their money as sound as possible – making a gold standard attractive – and debtors, who prefer more flexibility. A bit of inflation makes debts less burdensome; what you feel about that depends on whether you’re a borrower or a lender.

So the gold standard helps prevent inflation?

It does. But it also has serious disadvantages. In the early 20th century, currencies were tied to the gold standard, which brought some price stability at the cost of making it impossible to prevent the Great Depression. Now most economists argue that it’s an advantage to have a flexible currency – after all, if tying the lira to the euro has caused so much trouble, imagine if the euro itself was tied to the dollar and the dollar was still pegged to the contents of Fort Knox.

So gold is sometimes a good investment but rarely a good macroeconomic foundation?

That’s my view, and I think I’m in the majority of economists – for what that’s worth these days.

And what about Spam?

Well, Spam is an intriguing prospect. A good currency is fungible, homogenous, non-perishable and easy to carry around. Spam ranks high on the non-perishability stakes, and it’s also homogenous. Notwithstanding the existence of “Spam Hot And Spicy”, most people are likely to take the view that Spam is Spam. It’s not to everyone’s taste, though. Have you considered Mars Bars instead?

Mars Bars?

Nico Colchester, the great Financial Times journalist, once studied the remarkable price stability of Mars Bars. Cocoa, sugar, vegetable fats and milk solids are all valuable commodities and a Mars Bar offers you diversification in a handy ingot form. Prof Roubini might wish to investigate.

Also published at ft.com.