Here’s a mind experiment in regards to business ownership vs. gold ownership, since one disadvantage of gold is that investment in the metal precludes you from the ownership of productive assets…
An economy of two. Imagine you had just two people living in an economy — one who placed all of his wealth in gold and another who placed all of his wealth into business ownership.
How would the two investors progress in relation to each other over time?
A slow gold drain to meet daily needs. Each day, the gold owner would use his gold to pay for basic recurring needs. He would give some of his gold to the business owner in return for goods and services he consumed. After the first day, the gold owner would own slightly less gold while the business owner would own a tiny bit of gold, plus his businesses.
The hoarder is beggared. Over time, the business owner would own increasing amounts of gold while the gold owner would see his gold holdings decline. The business owner would continue to own his businesses, and could provide for his recurring needs based on the output his businesses produced. He’d then also amass gold.
In the long-run it seems the business owner would win out, turning the gold hoarder into an employee or serf once he had spent all of his gold, while the business owner controlled an expanding portfolio of productive assets. The gold buyer’s only exit from this fate would be to eventually buy productive assets using his gold. So this isn’t saying that the gold buyer was necessarily foolish to initially choose gold, it’s saying that he needs to remember that eventually he needs to trade back into productive assets, else meet the fate above.
Production is power and wealth. This mind experiment above suggests that true long-term economic power and wealth is built upon production. History supports this as well, take Spain vs. England during colonial times for example (Spain fell upon massive precious metals wealth thanks to the New World, while England developed the most productive economy, and beat Spain to become the world’s most powerful nation for a period).
Does this apply to the investment world today? So does this thought experiment play out between different investor groups in the real world? Do those who invest in productive assets win out over the long-term against those whose goal is the ownership of gold or any other non-productive asset?
Over the last 10 years, this obviously hasn’t been the case for listed stocks vs. gold, though many private business owners may have done very well. Yet past returns say nothing about the future, and eventually perhaps gold owners need to take their massive gains in gold and take ownership in the productive economy, even if it means buying private businesses or land rather than trusting in listed stocks. Because eventually you should own production if you want your wealth to be sustainable.