2023-01-10

The barbarous relic at the gate

All right-thinking economists dismiss gold as money. Keynes famously declared it a ‘barbarous relic’. But even after all these years, the yellow rock still gets investors and journalists excited (e.g. in today’s FT)

Part of the appeal of gold is its sheer longevity. For something to be a store of value, you want something with a track record. Gold has served that purpose longer than any other substance. Sure, it’s fairly heavy, but an ounce (28g) is not much of a weight to carry around for something exchangeable for about $2K. Systems like the Bancor, the SDR, the IMF, the convertability of the US dollar are all footnotes of history (or going that way). Gold remains an important, reserve asset for central banks.

Bitcoin, and other cryptocurrencies have been referred to as ‘digital gold.’ Well, that’s practically ‘gold envy,’ and certainly endorses gold’s status as a store of value. I may be wrong, but I get the impression that a lot of cryptocurrency are less enthusiastic hodlers than they once were, and just maybe considering diversifying into something more … analogue!

Of course, one of the main use of bitcoin was to bypass currency controls and sanctions. The noose is closing on crypto exchanges, with KYC regulation becoming more onerous than for a ‘real’ bank account. Buying some Krugerrands has never been so appealing … to a certain class of customer.

Gold’s Achilles Heel is that it pays no interest. With bond yields rising fast, one might imagine that this was a headwind for gold prices, but in fact since Nov. the price action has been very positive. The fact is that real yields are now deeply negative as we experience the secular shift into an environment of deeply embedded inflation, and it’s real yields that matter.

Money is generally a very safe liability, typically of a government. The acceptability of USD as a currency is intimately bound up with the fact that the Fed cannot run out of money, putting the credit risk on its promissory notes at zero. Gold is different. It’s money that is nobody’s liability. It’s not an entry in any bank’s ledger. The holder of gold will never by subject to arbitrary restrictions on who they may transfer it to, give or take transport costs.

Does this mean that the gold price will suddenly go to the moon? I am no Peter Schiff. No commodity is a sure-fire thing. But gold clearly has value, and the basis of that value is increasingly becoming ‘common knowledge.’ Market participants know there is safety in numbers, and will stay out of an asset until they can see the herd start to turn. Then they get with the programme, because they know that if they don’t they’ll be trampled under foot. Are we near that inflection point now? I really have no idea, but I feel that we are nearer to it now than we were a couple of years ago. Crypto has had its day. I don’t think it’s coming back. The FAANGMAN stocks are no longer the no-brainers they seemed to be. Energy commodities are on a glide-path down. Maybe precious metals will finally have their day in the sun.