Gold as an investment opportunity or a commodity of the past?
I’ve been in the gold market now for 38 years and in that time, people’s perception of gold has changed globally. There’s a widespread faith among people that central banks will sort everything out. It’s the kind of perception that Maynard Keynes encapsulated when he referred to gold as a “barbarous relic” - a kind of hangover from the past.
But gold is an ultimate store of value — it’s why the Germans are such big gold investors. The hyperinflation in the Weimar Republic is stuck in their minds. Think of those pictures of post-WWI Germany — people were taking a wheelbarrow of money just to buy a loaf of bread.
The global pandemic was a case in point. The value of gold ran up the minute the equity markets began to fall. But by July or August of last year, people felt no more need to own crisis assets and began buying shares in companies instead.
Gold is back at the forefront in Turkey because they’re experiencing massive hyperinflation. Their currency is collapsing and people are doing everything they can to get rid of their Turkish Lira and buy gold or buy US dollars or buy anything else that they think will be a better store of value.
In my home country of Australia, very few people own physical gold — but unlike Germany, we’ve never suffered from massive currency devaluation. However, there are sections of the Australian community like the Vietnamese that have a strong affinity for gold. They came here in the 1970s and the only wealth they could bring was the gold they had smuggled out of their country.
Why we abandoned the gold standard
It’s been over 50 years since Richard Nixon interrupted prime-time Sunday night television to tell the American public that they were going off the gold standard. To put it simply, the US dollar would no longer be redeemable for gold.
It started in the period between the World Wars. Up until then, gold could be exchanged for US dollars. But during the Great Depression, when the American dollar was growing weaker and weaker, nations like France started demanding that the dollars they were receiving from trade with the US came in the form of gold.
The number of printable dollars was interlinked with the amount of gold the USA held in reserves. Their government realised that if they delivered gold for the money they were printing, they would run out of gold — therefore, they wouldn’t be able to print more money. So they changed the rules — gold was no longer convertible to US dollars.
Thirty years later, the Americans were spending huge amounts of money to fund the Vietnam War. They needed more money, so the Gold Standard was finally dropped.
Why gold is (still) valued so highly
Before Nixon’s announcement, there had always been at least one currency backed by gold or linked to gold.
Gold has been money for millennia. Initially, people used things like bronze bars or cattle for currency. Over some time, the durability of gold and its physical properties won out over the alternatives. Gold was sufficiently rare but still found on every continent on earth, so it made a great source of value and ultimately allowed cultures to do away with bartering.
Gold is special because of its beauty. Moreover, it doesn’t corrode or rust. Gold bars have lain in sunken submarines for forty years at the bottom of the ocean — when they were pulled up they were perfectly intact.
Gold is remarkable for its malleability — it’s easy to melt and divide it. If you beat out an ounce of gold into a sheet, it would cover a whole tennis court. Draw it out into a wire and it would stretch many tens of kilometres long. Silver isn’t the same — it tarnishes. Whereas artisans can make truly beautiful things with gold because it’s so tactile. The result is that it makes beautiful jewellery — from the ornate jewellery found in the tomb of Tutankhamun to that of the Incas.
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How is gold valued?
The price of gold is determined by supply and demand. The price of gold in 1980 was traded at $ 850 — that was after the inflation of the 1970s — and the high wasn’t surpassed for another 20 years.
Some people argue that Satoshi, the alleged inventor of Bitcoin, had the same idea — to implement a limited increase in supply. That’s how gold works. Every year, production increases the global stock of gold by 2%. This is called the stock-to-flow ratio — in short, the flow of new gold is only 2% of the existing stock of gold. The finite nature of gold is what makes it so attractive.
When there’s a fascination for fast money and quick turnaround, gold gets pushed to the sidelines. But it always forces its way back into the mainstream. Bubbles eventually burst.
When my youngest son was born in the late nineties, gold was at its lowest — at 250 USD an ounce. That was before the .com bubble collapsed. When he turned 21, the gold price in Australian dollar terms was over $ 2,000 an ounce. Most people have no idea how well gold has done over the last 20 years.
Does gold have a place in the digital economy?
It’s never been easier in my working life to buy and sell or trade the gold price, though it’s increasingly difficult to buy physical gold — or indeed, to think about where you might store it. I have an account with a company called IG Markets — I can buy and sell gold with ease.
But things are going to get more difficult. The global effort to combat the impact of climate change will lead to the toughening of gold extraction regulations, owing to the chemicals used in the extraction process. In short, it’ll be more difficult for mining companies to raise capital.
What does the future hold? The 50 years since the abandonment of the Gold Standard is a blink in history’s eye. In the end, gold will always do well in a crisis. It isn’t an investment. It’s a form of savings — the very antithesis of our modern world’s obsession with quick returns and electronic trading.
About the author
Sean Russo is joint managing director and founding principal of Noah’s Rule, an advisory company that largely works with gold mining companies, helping them to build mines and providing them with selling strategies.
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