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Not all gold bugs wear tinfoil hats

A look at the investment merits of the yellow metal.
Gold bullion bars sit following casting at the Rand Refinery plant in Germiston. Picture: Waldo Swiegers/Bloomberg

Gold has had some reputational issues since reaching a record high in 2011. The thesis at the time was that a massive expansion of the money supply via the Federal Reserve’s quantitative easing programme would spark hyper-inflation, making hard assets more attractive than financial assets. Hyper-inflation never came to pass, which helps to explain why the price of gold tumbled almost 50% over the following four years.

We still don’t have very much inflation, and yet there is renewed interest in gold with prices reaching their highest since early 2013 at about $1 440 an ounce. There are a lot of reasons to like gold. One is that gold tracks fairly closely with budget deficits. The highs of 2009-2011 roughly corresponded with the large deficits that reached 10% of GDP during the Obama administration, which included the stimulus spending during the Great Recession and a sharp depreciation in the value of the dollar.

This time there is a sense that the deficit problem is large and intractable. The Congressional Budget Office forecasts the deficit will more than double to 8.7% of GDP by 2049. Also, there is open discussion of things such as modern monetary theory, or MMT, which would be about the most gold-bullish development imaginable.

Gold is the closest thing that we have to an objective store of value. Many disagree, saying there is nothing objective to gold’s value, since it generates no cash flows. That’s not the point. The point is that there is a finite amount of gold in the earth’s crust, there is growing evidence that we have mined most of it, and aside from traveling to an asteroid, we aren’t going to produce much more. (Full disclosure: I have positions that would profit from rally in gold and the shares of gold mining companies.)

Read: Gold sees wildest price swings since 2016

The cryptocurrency promoters argue that Bitcoin is an objective store of value, and they are somewhat right, since there can only be a certain number of coins in existence. But Bitcoin has some technical complications that gold does not, such as what happens if the power goes out? I have argued for years that tangible things you can pick up and touch are considerably more valued than lines of computer code. Time will tell.

Read: Bitcoin’s rally masks uncomfortable fact

But the biggest factor affecting gold prices recently has been the proliferation of negative-yielding debt. There are about $13 trillion of negative-yielding bonds in the world, and a shiny rock that yields nothing – but, admittedly, has some storage costs – is actually high-yielding in comparison.

Those who advocate the investment merits of gold are often labeled as “gold bugs,” which has become a somewhat derisive phrase, associated with conspiracy theories and tinfoil hats. But in the current political and economic environment, there are real intellectual reasons to think about gold other than hysteria over hyper-inflation due to money printing.

The hysteria over inflation due to money supply growth was pretty widely accepted in 2009, including by me, but it was the fear of inflation that drove people into gold, which worked out, and put options on 30-year bonds, which didn’t. In other words, gold can move on fear. It can move on fear of deficits and it can move on fear of MMT — even if those fears are never realized. Markets are occasionally irrational, but that doesn’t mean there aren’t opportunities to profit from the irrationality.

Every bubble has two phases. There’s the first move, which is backed by lots of speculative froth and retail participation, and the second move, which is the real move and that may not happen until years later. It happened with tech, first in 1999, which eventually involved into the FAANG group of stocks: Facebook, Apple,, Netflix and Google. It seems to be happening in Bitcoin, as the most recent thrust higher is mostly happening without retail participation. And it is happening in gold, where a dearth of retail coin sales suggests the surge higher is more about institutional and central bank demand.

People tend to invest in what they have an affinity for and what they agree with. Environmentalists and animal rights folks invested in Beyond Meat. Cannabis “enthusiasts” invested in cannabis stocks. Conservatives like gold. We should all like to invest in things that go up, no matter what they are.

© 2019 Bloomberg L.P.

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I must confess to you. I turned into the person I never wanted to be. At the age of twenty, I thought nothing could be more boring than the financial markets. The second most boring thing was world history. The third most boring thing was monetary theory. The fourth most boring thing was the debate about central banks and the value of gold. I believed that stuff is for old, boring people.

Now that I am almost three times that age, I have a passion for all those concepts. I find the interaction between historic events, the financial markets, reserve banks and the value of gold absolutely fascinating. I guess I am that old boring person now. ☺

You should enjoy this article then: Bretton Woods at 75: the threats to global co-operation https //

@Sensei. You’re everything except boring! *lol* In fact, your comment is worth its weight in GOLD.

So, as a member of the tin hats I will outline the case for the gold bugs.
International oil transactions are mostly done in USD (the petro-dollars), this being the worlds reserve currency, thanks to the Bretton Woods agreement. This artificially raises the demand for and hence the strength of the US dollar. (Defending this oil trade in USD is the role of the US military). Now the US has trillions of dollars in debt, increasing at an alarming rate. When the age of oil ends (the electric car revolution is well underway), the US debt bubble will pop and many people will awake to their horror and realize they are clutching almost worthless paper, except the gold bugs, who mostly collect silver coins anyway, despite the name!

Silver is only attractive because by some quirk of history it is a type of legal tender in the US.

Gold (and silver, platinum, rhodium, paladium, whatever) IMO have one value only : their value to industry, therefore simple supply and demand. The rest is emotional nonsense and damned good marketing by the jewellery trade.

Perfectly round white pebbles with star shaped red spots washed up from the ocean are rare : it does not make them valuable. If said pebbles also worked well in aerospace bearings, they would have some value. And if half the planet thought that said pebbles must adorn their fingers and necks and ear lobes – then they have some more value. But they still would have no bearing on currencies when financial markets turnover per day is dozens of multiples of the total value of all pebbles ever found. Gold bulls probably fall for crypto too – digital kubus, digital gold

You could be right, but then the major Central Banks must be wrong. The Federal Reserve holds eight thousand ton, China is believed to hold 1800 ton, Germany holds 3500 ton. They do not hold shells with red spots though. They do not use it for bearings and they do not wear this gold around their necks or on their ears either. They just keep it in a vault. Why?

You know something they don’t. Or, maybe, they know something you don’t.

End of comments.





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