Gold, a metal so loved by some, but also strangely regarded with indifference and even disdain by others. Take American investor and business tycoon Warren Buffet, for instance. For the longest time, Buffet held a rather derisive stance toward gold, claiming that “it [gold] won’t do anything between now and then except look at you.”
Given its lack of a “real use” outside of its main function as jewellery, plus the fact that it only incurs storage costs when owned instead of providing dividends, perhaps Buffet was justified in thinking that gold wasn’t worth the investment. But gold, the resilient yellow metal that has survived over thousands of years on its own merit, was determined to prove obstinate naysayers like Buffet wrong…
…and it did.
In the wake of stock market turbulence, Warren Buffet’s attitude towards gold is suddenly no longer quite so cavalier. For the longest time, Buffet was adamant that “gold is a way of going long on fear”, yet, in an unanticipated move, Buffet finally caved and bought gold! What caused this seasoned investor’s change of mind, seemingly overnight, definitely deserves a moment for us to reflect on the possible why’s—
Buffet’s original stance on gold wasn’t completely wrong, after all. If seen merely as a commodity, then gold serves hardly any purpose at all. It neither produces dividends nor can it be valued in a traditional manner like the discounted cash flow (DCF) method. If treated as inflation hedge or safe haven asset, then the purpose of gold is somewhat like owning insurance—you only benefit when an event such as high inflation or an economic crisis occurs. That said, why should you put your money in gold?
The answer boils down to the fact that gold can be perceived as a special type of currency on its own. In fact, throughout the centuries, gold has been treated like currency.
Up until the Nixon shock in 1971, it was even a permissible practice for the US dollar to be directly converted to gold at a fixed rate of $35 per ounce. While the gold standard has since been widely retired in favour of the fiat system, it hasn’t stopped gold from being viewed as currency in a dynamic free market setting. Only this time, instead of a fixed currency exchange rate, the rates and prices of gold fluctuate depending on its demand and supply.
Likewise, similar to other currencies, the exchange rate for gold is liable to either increase or decrease depending on a number of factors. Interdependent of each other, these factors comprise of trade and investments (net inflows) between the two countries. Independent of each other, these factors refer to the respective countries’ economic, political and social situations. When applying this to gold, we effectively have a de facto USD/GLD pairing, where GLD is the currency for an imaginary country called ‘Gold’ and USD is the currency for the United States of America. Side by side, the following characteristics stand out:
1. As of the first quarter of 2020, the US incurred a total of USD23.2T in debt (Chart 1). In addition, the country’s debt-to-GDP surpassed the 100% level as of a few years ago (Chart 2). On the other hand, gold being a non-country has neither debt nor does it incur yearly fiscal deficits to compound its overall debt burden (which is noticeably absent).
Chart 1: Total Public Debt
Source: Board of Governors of the Federal Reserve System (US)
Chart 2: Total Public Debt as Percentage of GDP
Source: Board of Governors of the Federal Reserve System (US)
2. The Federal Reserve is continuing to debase/depreciate the US dollar by printing more and more of the currency (Chart 3). On the other hand, Gold does not have a central bank that can freely produce gold. Furthermore, it takes years to discover gold and to bring it to market; the nature of its production ensures that the supply of gold is kept stable (Chart 4), and unlike most fiat currencies, the currency of Gold is protected from debasement.
Chart 3: Federal Reserve Total Assets
Source: Board of Governors of the Federal Reserve System (US)
3. Last but not least, the US, despite being a ‘superpower’, is not immune from being plagued with issues that threaten the country’s stability. Such issues range from social and political protests, especially in the aftermath of Trump’s political defeat and Biden’s inauguration to the presidential office, geopolitical strain (e.g., rising tensions with China) as well as the continued health crisis that is the COVID-19 pandemic. Gold, by contrast, being a non-country, does not have to contend with such issues.
Chart 4: Gold production
Source: World Gold Council
One could say that, based on the above characteristics observed, gold is indeed a superior currency that is winning over other fiat currencies. And, although it took Warren Buffet many years to come to this realisation, he is definitely fortunate to have finally struck gold.
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