A reader writes in to ask: Why gold over other commodities, such as oil.

Of course, one might ask the Federal Reserve the same question, since the only reserve asset of any size that it holds is gold.

Why is that?

Never mind that gold has been money for thousands of years and seen numerous paper currencies and commodities pass away into the dustbin of history. In my opinion, the reason gold is preferable for investment purposes (generally) and why the Fed and other central banks hold it as a reserve asset is because gold is a “store of value”.

Stores of value have some very specific characteristics which gold has and oil does not. In the specific case you are asking about, gold is easily saved and stored, whereas crude oil requires large and expensive storage facilities. It can also be easily destroyed with fire.

I would also argue that in the current environment you want to be long a hard asset that isn't GDP-sensitive. After all, the type of inflation that is occurring at present is supply-based (i.e. the Fed is monetizing paper assets to the tune of $1.75 trillion, whcih is likely to increase as time goes by), not demand-pull based as it was in the 1970s.

In theory, demand for crude oil in the real economy could remain weak despite the Fed and other central banks rapidly inflating. Thus oil prices could remain elevated but relatively stagnant, while gold, which is not as GDP sensitive, explodes.

We also saw this thought process in practice just last year when every other commodity besides gold (including crude oil) imploded during the “global margin call,” but gold finished the year positive. In fact, other than US bonds (thanks to the Fed goosing them at year-end by threatening to monetize them, which triggered short covering), gold was the only asset class to not implode in terms of dollars in 2008.

Since then, even bonds have fallen behind gold’s performance and collapsed back to the lowest levels in over a year, while gold is up about 10 percent on the year, which will also incidentally make its 9th straight year of gains if it hangs on that performance or betters it.

So, the next time somebody says, “Gold? What in the world would I want with that worthless metal? I prefer other commodities that you can actually use.” You can simply respond, “Ask the Fed. The only reserve asset of any size that it holds is gold. If gold is good enough for the Fed to hold as a store of value, it’s good enough for me.”