Ah! Gold.

by Ingolf Eide

Gold’s swoon has triggered a good deal of schadenfreude, some subtle, some less so.

It’s hardly a surprise after eleven years of gains and often tiresome crowing from its more partisan supporters. Question is, apart from the emotional satisfaction of putting the boot in, are these critics justified?

Their complaints seem to revolve around four principal themes:

• Gold isn’t an investment. It produces no income and should therefore, at best, be regarded as a trade.

•  It can’t be valued properly. With no income, and no shortage of existing stocks, the bull case is entirely reliant on an unending supply of greater fools.

•  Gold’s supporters are true believers, more akin to members of a cult than rational economic actors.

•  In any case, it’s way too volatile to ever be a proper currency, even if that were theoretically possible or desirable. All the fools who bought the “gold is money” pitch are going to get buried.

Well, maybe.

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In any case, let’s consider them one by one.

• No argument: gold isn’t an investment. If it’s anything (monetarily speaking), it’s base money, or currency. To believe otherwise is a category error. Most serious gold bulls understand that even if the word “investment” is sometimes bandied about carelessly.

Whether “trade” is the right descriptive term is a bit trickier. For some, it certainly is. For others, however, those who categorise gold as money, it’s a precautionary holding, likely to do tolerably well if most other things financial are going down the tubes.

•  Can gold be valued properly? Seems more like a zen koan than a question with a clear answer, doesn’t it? At one level, the critics are undoubtedly right: with no income stream and superabundant existing stocks, gold is entirely at the mercy of perceptions. Still, it’s also true that greater fools have shown up with reassuring regularity for the last few thousand years. Is that likely to change any time soon? We’re probably each obliged to answer that question individually. And to accept the consequences.

By the way, while gold doesn’t yield anything, nor does physical currency. To earn anything on either, you have to lend them out.

•  It’s certainly true that there’s a sizeable subspecies of goldbugs who are cultlike in the intensity of their beliefs. They have their demons, their gods, their sacred texts, and see this crisis as the final scene in a battle between good and evil. Gold for them is a symbolic lightning rod, not to be subjected to dispassionate analysis, much less ridicule.

Thing is, stripped of this emotional baggage (which is in any case rooted in politics and often religion), their monetary beliefs aren’t without foundation.

There is, after all, a long history of gold as money. Not as the reflection of some quasi-religious belief, but as a matter of cool, pragmatic, bottom-up agreement. It’s what the markets chose and for all its intermittent problems, the (real) gold standard worked well for a long time. Even today central banks all have gold on their radar screens (unaccountably or otherwise) and quite a few are busy acquiring more. Indeed, much of the non-Western world continues to view gold as real money. Foolish? Perhaps, although I don’t think so. In any case, ignoring that possibly uncomfortable fact is even more foolish. After all, right now these are the guys and gals with the savings.

•  And yes, it does fluctuate, sometimes a lot. It’s hardly alone though, is it? US stocks fell 23% in one day in 1987 and some 30% in a few weeks in 2008; the yen tumbled 18% in under a week in 1998. And so on.

Did this lead to their dismissal as an asset class? Of course not. These things sometimes happen in markets where speculation has run rife. When the stars then align and players from every time frame suddenly find themselves on the same side of the market, weird stuff happens. Sensible people understand that and form their views accordingly. Certainly, drawing far reaching conclusions from such structural aberrations is plain foolishness.

Time alone will provide the answers to most of these vexing issues. We’d probably be wisest to pay no more attention to the (often amusing) fulminations of the more extreme critics than to those of their targets.

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So, has gold bottomed?

Well, nobody knows of course. Short-term, it depends on whether the weak hands are finally out. FWIW, I think most of them probably are. Longer term, what matters are the policies governments and central banks run in years to come. If fiscal and monetary prudence took centre stage, gold would almost certainly go into a long-term nominal bear market. If, as seems to me more likely, the current activist extravagance persists, or intensifies, then the nominal (and probably real) upside still beckons, perhaps with even greater volatility. And, quite possibly, for years to come. We may as yet have only seen Act I.

In any case, caveat emptor.


P.S. The title comes courtesy the traditions of a popular Urdu newspaper. According to a friend who once read it regularly, whenever a local notable died it invariably printed a minor editorial with the heading (for example): “Ah! Qasim Rizavi.”