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Who Says Hoarding Gold Doesn't Help Economies?

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The funny thing about gold as an investment (other than its volatility) is that it's inherently useless: It doesn't throw off dividends, accrue interest, or do anything for anyone besides sit around looking shiny.

And while gold can be a useful safe haven for investors in tough times, when you think about it, its value to society seems dubious. Warren Buffett captured the silliness of our obsession with the yellow metal when he pointed out it "gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. ... Anyone watching from Mars would be scratching their head."

But hold up, Martians. We don't need your judgment. Sure, hoarding gold while hiding from stocks might not appear to generate economic activity. Until, that is, investors buy so much of it that banks start running out of room to store bullion. Then they need to build more vaults. Boom: Construction jobs. Everybody wins!

As Bloomberg News reported Wednesday:
Barclays Capital is building a new vault, The Brink’s Co. and Deutsche Bank AG may add more space, and the Perth Mint may expand for the first time since 2003, a sign they expect demand to keep increasing after the 11-year rally during which prices increased sevenfold. Investors in exchange-traded products backed by gold bought 2,236 tons of bullion since 2003, exceeding all except four countries’ official stockpiles.

How much more gold is getting squirreled away in vaults these days? "Gold bought for investment accounted for 38% of total demand in 2010, compared with about 4% a decade before," Bloomberg reports.

With private investors paying up to 1% per year for banks and vault operators like Brink's to store their gold, you'd think more people would just stack the stuff in the basement. But that's not how it's done: “With gold prices where they are, we encourage people to keep it in safety-deposit boxes at banks or vaults, which gives that sense of security,” says Scott Carter, CEO of Goldline International.

Ever the pessimists, Fox Business asks: "The obvious question, of course, is what happens to all these new vaults when investors unload their hoards of gold?"

That's easy: Decommissioned bank vaults make lovely cocktail lounges. Behold, the Bedford in Chicago's former MB Bank building:

Image courtesy

(See also: Is the Gold Bubble About to Pop?)
POSITION:  No positions in stocks mentioned.