For every gold enthusiast, there are gold sceptics many times over. The case for Gold is well known: its long history of usage and value, its universality and longevity, humankind’s emotional attachment to it. The list is long and could be discussed for quite some time. But what about the case against gold. Here are three popular arguments and how we think they can be countered.
Gold is just a speculative asset
“Gold price is just based on speculation”. This is one claim often repeated. Furthermore, this argument is linked to the “gold has no utility” argument. The pejorative use of “speculation” implies that the instrument in question solely exists to be traded for price appreciation or depreciation.
Yet, the amount of gold and gold derivatives traded on the market daily, being bought and sold, is insignificant compared to the actual amount of gold NOT traded, i.e., gold that is being held and not sold. This implies that the majority of gold holders are happy to do nothing with their gold. Thus, with real demand for gold, many critics dismiss it outright because of an apparent “lack of utility” and “lack of cash flows”.
Indeed, governments huge hoarding of gold, despite serious debt issues, demonstrates there’s a reason to squirrel away gold. And when the biggest players in the market are not only selling but accumulating, then it’s folly to be short with the asset.
For the critics, holding gold is stupid, but the argument is undermined by the fact that so many powerful actors disagree. And asserting that something is worthless is an opinion, not a fact, otherwise, there would be a value assigned to gold by the market.
There is no inflation so gold is useless
This assertion takes into consideration the widely known definitions of consumer inflation while ignoring what has gone up in price in recent years. For the former, wage, food, technology and clothing, etc. have indeed not had any real inflation.
This is in part due to the oversupply of cheap labour, globalisation and technology itself. But, in terms of asset price, rents, property, stock indices and asset valuations inflation has been significant. How could it not be? The Bank of Japan, European Central Bank, Bank of England and the Fed have all expanded their balance sheets by huge amounts helping force asset prices higher. The money had to go somewhere.
And as we’ve seen throughout this year, the idea that rates will rise again soon is but a fantasy. If anything, with too much debt the central banks will have to again turn to what were previously “unconventional” policy tools with more negative rates, Targeted longer-term refinancing operations (TLTROs) and central bank buying of equities. As this sort of aggressive monetary policy becomes the norm, leaders and politicians will use it more and more.
There may be no inflation now and it may take a long time to arrive but with the political world so relaxed about these policies and new ideas (See MMT article from two weeks ago) such as universal basic income, negative tax rates or minting a USD1Trillion coin to pay off the US debt in the chances of inflation getting out of control to remain significant.
Gold is just a doomsday hedge
Currencies, states, treaties, empires have all come and gone. At their zenith, they appear strong and stable; it’s inconceivable to think of a world without them. Yet history is full of examples of countless failures. On a multi-generational scale, it doesn’t take long to look back and see successive republics rise and fall and currencies debased by eager politicians.
This has been the rule of thumb for all of recorded human history. And while lessons were learned, they are quickly forgotten when circumstances change (2008 recession, 2011 Eurozone Debt Crisis). And these policies then become the norm. As we have noted in the past, it’s now 20 years of significant central bank intervention in Japan. When states, regimes or empires struggle to survive they will nearly always print money.
The assumption that this would not happen in the West is dangerous because it’s already happening. In a period of state collapse and currency devaluation, anyone holding gold will have a significant advantage. This is not just in the past either. Those lucky enough to hold some gold while living through the Venezuelan crisis at the moment will be glad they did.
“Oh, but it would never happen here plus in the West, we have far stronger currencies” is the usual reply. Yet it has already begun. The asset price inflation has created a huge crisis in inequality and perceived inequality. This can be seen as more right-wing policies int he US and Europe take hold. Indeed, this week, a two-year-old Dutch right-wing party did extremely well in the vote. The AFD is the official opposition in Germany. Never in recent times has politics been so uncertain.
Until next time.
Important disclaimer: this document is not an official research report and the views expressed in it are those of the authors. The authors are not registered research analysts and there is no assurance the trends mentioned will continue or that the forecasts discussed will be realised. Gold as a commodity is not a specified investment for the purpose of giving advice under the Financial Services and Markets Act 2000, therefore, this it does not give rise to rights to claim compensation under the Financial Services Compensation Scheme.