The price for a troy ounce of gold has risen 38% in the past 12 months. Despite the rise in price, the shiny yellow metal is still unloved by speculators and investors. So, who is buying? Central banks have been aggressive buyers of gold bullion since the great financial crisis of 2009. Unlike the American Great Depression when the US dollar had a fixed exchange rate to gold, today the US and the other three main central banks have no such restrictions. They can print as many dollars or euros, British pounds or yen as they wish with impunity. The central banks are responsible for liquidity in the financial system, the life blood of commercial banks, for which they are responsible. As they create more money, this drives up asset prices like stocks and commodities.
The portfolios of investors and speculators who own these assets are valued not in gold but in USD or other FIAT paper money made legal tender by government decree. The result of too much money chasing too few goods and services is inflation. For example, the US dollar has lost 96% purchasing power against gold since 1913. Another example often given is that in the first century AD a Roman officer’s off-duty tunic could be bought for an ounce of gold. Today a well-cut and tailored gentleman’s suit would cost around USD 3,000. The price of an ounce of gold.
Whilst speculators look to trade the gold price for a short-term gain, gold exchange traded funds (ETFs) or gold futures on the Comex futures , investors , like central banks, understand that gold is a store of value, unit of account, fungible and as such is a hedge against the devaluation of the purchasing power of FIAT currencies. Whilst the four main central banks will not admit it, the value of FIAT money that they create is indirectly backed by gold. The investor who understands the case for owning gold holds it for the long term and further understands that an increase in the price of gold means a decrease in the value of the US dollar and all other assets denominated in US dollars and FIAT currencies.
We are currently in the third bull market for gold and have been since 1972. The two previous bull markets lasted on average of 12 years. Depending on when you start counting, this current bull market has another two years to run. A long-term investment strategy should include gold as a hedge against the depreciation of FIAT currency, especially since an increase in the gold price is an indication that other asset values are falling. This should not be encouraging for the real values of stocks and commodities. But then as long as prices are rising, who cares?
Jeremy Blatch TEP