Everything That Glitters Is Not Always Gold

A gold mine is a hole in the ground with a liar standing over it.

Mark Twain

From sceptics like Mark Twain and successful investors like Warren Buffet, to gold bugs who are ‘evangelical’ in their belief in the yellow metal, gold is either loved – or hated. In reality, with the exception of gold jewellery, very few people own gold as an investment, either in physical or paper form. The interest in Bitcoin has given speculators a new ‘virtual casino’. They have witnessed the cryptocurrency rise a ‘glittering’ 1,500% against the US stock market S&P Index this year, compared to a ‘dull’ 8% for gold. In spite of that, to compare Bitcoin or any cryptocurrency with gold is to misunderstand the very reason for owning it. Gold has played an important role in civilization for thousands of years and, to some extent, it still does.

Gold is sound money. A store of value. An ounce of gold today will buy a quality gentleman’s suit. In fact, an ounce of gold in 1929 at the height of the Great Depression would also have bought a gentleman a good quality suit! Another advantage of gold is as a store of value: it is a hedge against inflation and against a weak US Dollar, as gold prices move inversely to the USD. Unlike volatile FIAT currencies (which are issued by government decree), the gold price has historically exhibited little volatility, and proved to be a reliable store of value throughout history. Major central banks, once sellers of gold, are now net buyers.

Cryptocurrencies, used by criminals, millennium ideologues and speculators, are also FIAT and exhibit the same flaws as paper currencies. They have never been tested in times of crisis. There have been as much as 609 FIAT monetary experiments in history, all of them ending in failure and 25% of them in hyperinflation. Just as an example, the price of a loaf of bread in 1923 Germany went from half a German Mark to 200,000,000 Marks.

So, let us see, how has gold performed in times of recent market crises? The following graph makes the case:

Gold’s only sell off – 46% – occurred just after its biggest bull market in modern history, when gold rose 2,300% from its 1970 low, to the 1980 peak.

Gold yields nothing, and is speculative. We should not own gold for the good times but for times of crisis. As a portfolio diversifier and insurance against unexpected market and geopolitical risk, heightened today with the risk of cyber-attacks, gold does not have an equal. How much and how an investor should hold gold is certainly another question. Investors would do well to remember that market risk cannot be avoided, it must be managed. The market can stay irrational longer than an investor can remain solvent.

Jeremy Blatch TEP
Society of Trust and Estate Practitioners Logo

This article was also published in the online and print editions of the Sur in English