Gold Could Finally Rise According To Fundamentals
Getty Images/Dario Pignatelli/Bloomberg
Gold is probably the most controversial and talked about asset. We've all read about or witnessed heated arguments involving the yellow metal. There are two hardcore camps as far as gold is concerned:
The Gold Bugs
(or their most extreme version, the "preppers"): These are people who believe that gold is the most important form of money, with thousands of years of monetary use in humanity's history. They are convinced that there will come a time when the "reset" will come. When all fiat money will be massively devalued (given the relentless money printing that started in force during the financial crisis), and when gold will rocket higher to $2000, $5000, $50000 - take your pick on a price with many zeros. Preppers believe that humanity will reach a point where the world's financial (and social) system will blow up and the most valuable possessions on the planet will be gold, weapons, water and canned food.
The Gold Haters
: These are people who believe that gold is, to use John Maynard Keynes's famous description, a "barbarous relic". Many world-class investors (such as Warren Buffett) believe that gold is just a shiny rock that has little or no intrinsic value. Others dislike the metal so much that with almost every sentence they write, they close with a sarcastic "buy gold" comment.
I'm going to disappoint preppers, but I think that we can safely say that if the world apocalypse comes, people will have much bigger problems than having enough gold. On the other hand, gold has been a monetary metal and/or store of value for thousands of years, and its price has been steadily increasing broadly in line with money supply. All major central banks hold considerable amounts of gold reserves, the Fed in particular storing its 8133 tonnes of gold inside the most secure building complex in the world. China is being super-secretive about its gold reserve levels, which have been increasing considerably in the past decade. So it's a near zero possibility that it will ever become worthless (sorry Warren). For the purpose of this blog post, we will ignore these two extremes.
So, what is it about gold that makes it so special? What are the underlying trends of the past decades? Where could it be heading? Let's take a few steps back and examine it in more detail. Money supply used to be linked to gold (or silver) from ancient times. In modern history, the US Dollar was linked to gold and the two were fully convertible at $20.67 per ounce for several decades. In 1934, goldprice.com President Roosevelt confiscated Americans' gold and then conveniently revalued the price to $35 the same year. Then came the Bretton Woods system: a system of payments based on the US Dollar, in which all currencies were defined in relation to the Dollar (itself still fully convertible to/from gold at $35 per ounce). As US money supply grew and physical gold stock couldn't keep up the pace, it was unavoidable that the gold/US$ convertibility eventually crumbled. In 1971, President Nixon shocked the world and unilaterally cancelled the direct international convertibility of the US Dollar to gold.