For old-school wealth managers, allocating roughly 10 per cent of one’s savings to gold was standard advice. Gold was, they would argue, a necessary hedge against the reckless habit of governments to print money with abandon.
I still remember the conspiratorial, expert smile of the white-haired Swiss banker who predicted an imminent surge of the gold price without any good evidence. The case for gold was its supposedly limited supply – other than fiat money, IOUs of the financial system, which would invariably profligate and unavoidably devalue over time.
Ironically, the Swiss franc held up pretty well over the years when compared to other currencies. Even during the recent post-COVID bout of inflation, Switzerland did not suffer from the same exorbitant price rises as did the rest of us.
The Swiss franc seems to be inflation-proof. It would have been a decent hedge, with hindsight. To understand gold as an inflation insurance is standard thinking; yet the corelation between the gold price and inflation is tenuous. Gold rose steeply from the 1960s to the 1980s, a period of increasing inflationary pressures, yet started to deteriorate in absolute and real prices long before Volker’s battle for more stable prices was won.
In the years after the Great Financial Crisis of 2009, in order to help moribund economies to get on their feet again, the world’s central banks embarked on a drastic loosening of financial conditions.
For more than a decade, money was showered on financial intermediaries to get credit going, with CBs buying up financial assets at exorbitant scale. They were pushing a string. All their money did nothing to boost bank loans. And neither did all their “printed” money make a dent into disinflation.
Gold had risen in immediate steps before, in 1933 and later in 1970s, when the US first weakened the gold standard – i.e., each dollar fully backed by gold reserves – to then discard the gold backing entirely in 1973 when gold emerged as an asset class.
A few years ago, I wrote an analysis of gold for this paper, inspired by a friend who was worried by the fiscal excesses of governments during the lockdown years.
He had started to invest in gold – at the then exorbitant price of $1,790. I described the mechanics of gold as I knew them, starting to debunk the myth of “limited” gold supplies.
The total quantity of gold, I wrote, was never diminished or capped in history. Mining would add continuously to the existing, indestructible pile.
I listed observable correlations. A weak dollar would boost the price of gold as it becomes cheaper for investors in other currencies to pile in. Rising interest rates would drive down the price of gold.
Gold does not yield any interest, quite to the contrary. Its custody and insurance costs money. Hence, it loses its shine when other asset classes pay generous yearly rewards for holding them.
Gold has very little intrinsic value. It is not an industrial metal boosted by demand. Neither dentists nor jewellers are sizable buyers.
Gold is not much more than a human tradition. It has a mythical significance and general acceptance over millennia.
Then I mentioned digital currencies like bitcoin, which other than gold have a finite total quantity. Rarity is programmed.
If generally adopted as a means of wealth preservation, prices could only go up, forever. I even argued that the rising success of bitcoin would undermine the case for buying gold. Well, it turned out that bitcoin and other digital coins had absolutely no correlation to inflation whatsoever.
Gold has very little intrinsic value. It is not an industrial metal boosted by demand- Andreas Weitzer
It rose when risk appetite was growing – inflation or not. And it fell, reluctantly, when the promises of new financial freedoms, freedom from banking, freedom from governments, freedom from financial policing, freedom from money as we knew it, were debunked one after the other.
Deposits in DCs are a high-risk undertaking, with theft and irretrievable loss becoming a standard feature. Even the FBI grew better in tracing illicit digital money flows.
And it turned out that returning with a pile of bitcoin into the real world was a tricky undertaking, as any conversion into local currency and any purchase attracted sobering scrutiny. “I have mined them” was not sufficient to explain sudden wealth, it turned out.
Yet like stamps or antique toys, DCs will remain an object of speculation. And funnily enough, the advent of Bitcoin ETFs, a total submission to the traditional world of banking, has given DCs a new, stable lease of life. Revolution is cancelled.
Well, my gold-bug friend had the last laugh. Gold is shining again. At the time of writing, an ounce is sold for $2,300 and rising. He has made a gain of 28 per cent in a couple of years. Less than the S&P index, but respectable. Interest rates are at levels not seen for a generation. The dollar is going from strength to strength.
Bitcoin has jumped over the last few years to levels not seen for a long time. All standard explanations should see the gold price tanking. What is happening here?
I have been wrong, all along. Gold, it turned out, is not perceived as an inflation hedge. Gold is the ultimate hedge against fear. When everything breaks down and the lights turn off, bank deposits may be hard to come by. Digital money will be stuck in the metaverse.
Governments may come to an end and, with them, the money they issued. Bartering for food may become essential. Sitting on a bag of gold coins can offer perhaps the only peace of mind (as long as one’s hoard is well hidden!).
The war in Ukraine, the war in Palestine and ever-rising tensions between the US and China have ratcheted up the risk of an all-out war, a WWIII.
Investors seeking returns would focus on defence stock, or the US dollar, or the yen, or Swiss francs.
Savers full of fear will return ruefully to gold. Two observations can illustrate this: Gold ETFs saw persistent outflows for the last three years, while total worldwide purchases of gold in 2023 reached an all-time high of 4,899 tons globally.
To speculate on the price of gold, ETFs are a far more convenient instrument to do so. Transactions do not depend on physical delivery, costs are low.
Yet ETFs are out of favour while physical gold experiences a new boom. Remarkably, the biggest buyers of bullion in 2023 were central banks, with 1,034 tons. Mostly those like Russia and China, who want to safely decouple from payment systems which can too easily be disrupted by western opponents as we have seen in the case of Russia.
It seems that savers as well as sovereigns are preparing for extreme scenarios. Let’s hope they are wrong. A world where only gold coins and cowrie shells are an acceptable means of exchange would mean the end of a world as we knew it.
Andreas Weitzer is an independent journalist based in Malta.