A value investor’s reluctant case for gold

I can debate the value of Microsoft or Caterpillar with my value investor friends. We can stress test each other’s assumptions on revenue, margins, capital expenditures and arrive at cash flows. Gold has none of that. It is perceived as currency, as a store of value. It is a story. It is worth what other people are willing to pay for it.

And yet here I am.

Here is what changed my mind. Not something about gold. Something about the dollar.

The U.S. dollar is the world’s reserve currency. It has had a well-deserved place since WWII, and that rested on three things: the largest, steadiest, most diverse economy; a politically stable democracy; the best military.

All three are cracking at once.

The Economy

The U.S. is running a 6% budget deficit in peacetime. Peacetime is now over.

Deficits may climb from here with the $1.5 trillion proposed defense budget and if, more like when, we go into recession or the stock market declines or both. This is the good part of the cycle, and we are already borrowing like it is the bad part.

We carry our highest level of debt since WWII. And interest on that debt now costs more than defense. It crossed in 2024 and has stayed there. It is the second-largest line in the budget, only behind Social Security. We are paying more to service the past than to defend the future.

Political Stability

Our enemies are stronger and more united: China, Iran, Russia. And we have fewer friends.

Alliances built over three generations are being destroyed. We are an erratic, unreliable ally and friend. We are threatening to take Greenland, a NATO ally’s territory, because “we need it.” Denmark, Britain, France, and Germany have put troops on the island. Allies now defend against us. The moral high ground is lost.

At home: blatant kleptocratic corruption in the White House and self-dealing. Politically gridlocked, polarized. The least cohesive society in generations. The ruling party uses government to attack the opposition: lawfare.

Fed independence is in question even more than usual. In the past, presidents privately told the Fed what to do. Sometimes it listened, sometimes it did not. This time the Justice Department was used to investigate the Fed chair and a sitting governor. The investigations went away; the precedent did not. Gold and silver jumped the day the probe became public.

We also see a rise in democratic socialists. One was elected mayor of New York. He appointed a tenant director who wants homeowners to have “a different relationship to property than we currently have.” When that surfaced, he said he disagreed. He kept her anyway. This may or may not turn into a broader movement. But the perception alone moves capital.

And when governments run out of income, they start looking at the balance sheet. Wealth taxes, retroactive levies, exit taxes. California votes on one this November. Capital goes where it is most welcome. A tax on what you own rather than what you earn pushes people toward wealth that travels. Gold has no registrar, no jurisdiction, no counterparty.

Foreign governments have already learned this lesson. The dollar was weaponized after Russia invaded Ukraine. Russian reserves were frozen. The US dollar is not a safe storage of value if you are an enemy.

The Military

There is a perception that the war with Iran was lost, a bigger embarrassment than the exit from Afghanistan, which arguably gave Putin the confidence to invade Ukraine. This increases the risk of China invading Taiwan.

We built a military for the Cold War, and yet it is unable to beat a much weaker country using asymmetric warfare. We spend $4 million on a Patriot interceptor to shoot down a $20,000 drone. Our enemies build drones by the thousands a month. We build interceptors by the hundreds a year. Our magazines are near empty, and rebuilding them takes years, not months.

China has a much stronger manufacturing and energy base than we do. In a war of attrition, the side that can build wins. We also lack the rare earth minerals a modern military requires.

And yet, the other side of the coin

All these arguments notwithstanding, we still have the largest and best economy in the world, with little competition. That “and” is important.

Europe is in worse shape than we are, politically and economically. China is a contender by size and possibly by economic strength, but it is not a democracy. It has currency controls. Its currency is a roach motel: you can get in, you can’t get out. Its economy is a black box, and it has plenty of problems of its own. Switzerland is probably the best contender, but the country is too small.

The dollar has no successor. Which is exactly the point. Capital that wants out of the dollar has nowhere else to go, so it goes to the one reserve asset no government issues.

Conclusion

I am not buying firearms, canned food, and a cabin in the mountains with an independent water supply.

Gold is one position among many. It is not 30% of the portfolio. It takes one or two slots that used to belong to stocks or cash.

The opinions expressed in Fortune.com commentary pieces are solely the views of their authors and do not necessarily reflect the opinions and beliefs of Fortune.