For some four thousand years, gold has held a unique allure, due to its scarcity, almost complete indestructibility and malleability. Early societies operating independently of each other bestowed upon it the status of beauty, leading to its use as an adornment, so that when it came time to move beyond barter exchange, the usefulness of which was limited by its dependence on a coincidence of wants, these same qualities ensured it also became the natural choice as a currency, long before the introduction of paper money.
Despite its tangible physical properties, gold’s ancient historical pedigree, cultural cachet and association with splendour, has undoubtedly lent it a mystique. Yet, the spell that it casts has, in much of the modern world at least, also acted to retard its integration into the more abstract investment space.
On the one hand then, the fact that gold has been all too often ignored and overlooked over the years from an investment perspective can be attributed to market snobbery. On the other, gold has also been a victim of its own seemingly unique behaviour, for the yellow metal appears to behave differently to other asset classes and takes time to know.
The yellow metal takes time to know.
The befuddlement over its identity, bearing and role has seen those in positions to accelerate its fortunes, exercise extreme caution. Just think of the SEC in the early 2000s, which, for a long time, could not get its head around gold exchange traded funds.
However, while thirty years ago, gold was an irrelevance in the investment space, today it is becoming increasingly ubiquitous, treated like a currency and established into the financial system, its qualities as a portfolio diversifier, a hedge and a safe haven, having never before been so widely recognised.
With investors coming to realise the extent to which gold retains its purchasing power, as outlined by Roy Jastram in his seminal work The Golden Constant, word on its ability to safeguard wealth through crises has spread. As Dr Alan Greenspan, former Chair of the US Federal Reserve, recently commented, ‘credit instruments and fiat currency depend on the credit worthiness of a counterparty, (but) gold…has an intrinsic value.’
As demographics have shifted and markets opened up, investors are increasingly able to disconnect gold from its bar and coin physicality. This means it is not so readily viewed as an alternative asset, but more as a wealth preserver, so affording the confidence to invest in riskier assets.
Investors are coming to realise the extent to which gold retains its purchasing power.
For many, gold remains peripheral to the financial architecture. The key to widening participation and increasing allocations to gold, lies in policy makers and investment leaders coming to recognise that the yellow metal is a by-word for safety, security and stability. Moreover, the instruments for investment must be current and fit for purpose and the necessary information to hand to support its well-articulated investment case.
The message that gold is not just for the turbulent times is yet to get through, perhaps because it appears to run contrary to the established narrative. In the public relations space, nothing resonates like a straightforward soundbite. Think: ‘Make America Great Again.’
Given pension funds’ decades-long life cycles, gold has a very credible role to play in this space, for so long as there is an appreciation of some level of volatility over that period, history to date shows gold delivering preservation of the underlying value of the asset, risk mitigation and income generation. In addition, gold’s credibility will be given a boost as the world economy re-balances towards a multi-currency reserve system.
Gold is not just for the turbulent times.
It should be noted, however, that gold has already travelled some considerable distance on the road to mainstream status, most notably via Gold ETFs in mature western markets and Gold Accumulation Plans in China. Meanwhile, institutional investors in Japan are signalling the future, as they increase their gold holdings. This is a state of affairs likely to be echoed in the West in the years ahead, as those with long-dated investment horizons are compelled to rethink strategic asset allocation strategies in the face of enduring head winds.
Meanwhile, the retail and mass affluent end of the market also get that gold is an unparalleled insurance asset and alternative to cash to protect their wealth and pensions in difficult times.
With global financial markets cumulatively valued at well in excess of $150 trillion and gold accounting for less than 1% of that total, raising portfolio allocations, even fractionally, would have a significant effect on demand.
Gold’s shift from West to East is set to continue.
West to East
Gold’s shift from West to East is set to continue unabated, with China and India’s dominance becoming, if anything, even more pronounced, driven by the type of continued economic growth the West can only dream of, although others, such as Myanmar, Laos and Vietnam, are also set to make their mark.
As RMB globalisation gathers apace, the world will see the PBoC loosen its vice-like grip over gold imports and exports. That this will happen is not in doubt, it is only when that is open to debate. Gold has a major role to play in this story, which will ultimately see China having a bigger voice in price setting. As the world’s largest producer, consumer and exporter, this is as it should be.