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Gold is at a record high, but is it really money?

The gold price hit a record high recently as investors decided the precious metal is a great safe haven in troubled times. But is it really money?

The gold price hit a record high recently as investors who have decided the precious metal is a great safe haven in troubled times. But is it really money?

Charles Stanley

in Features Fiduciary news


The world’s leading central bankers are holding their annual Jackson Hole conference as an online event. The custodians of modern currencies will discuss how many dollars, yen, euros and pounds they should carry on creating to sustain the recovery. They hold the future of markets and the world economy in their hands, and are expected to remain supportive. It’s time to talk money.

To some gold, is the best kind of money. They see it as the ultimate store of value, the currency individual governments and central banks cannot debase. The relatively small increase each year in supply from new mining should prevent undue inflation. To others, gold is a relic of a long-gone era. There may still be gold coins around, but you cannot take them to the supermarket to buy your groceries nor do you expect to settle your house purchase with some gold bars. We have long since passed on through the era of paper money to the new state of digital currency.

Most money today takes the form of an electronic entry in a bank account which we trust as our deposit or current account to spend as we wish. Similarly, we trust savings institutions to hold our other financial assets at a stated money value through some electronic register.  People more distrustful of banks and electronics might still want to have holdings in bank notes, which they then have to hide away and protect. A few keep their wealth in gold bars or a hoard of sovereigns. These too need safekeeping.

Money has three main characteristics. It is a store of value. Gold can be that, but it can also live through quite long periods when it is out of fashion and loses its holders substantial sums as counted in major currencies. In these conditions it is difficult to claim it is that store of value.

That’ll do nicely?

Money is a means of transacting business. Gold has long since been superseded given the security and physical problems with using gold especially for larger transactions. Digital money rules. Money is a means of comparing values.  Gold could still be used for this, with prices expressed as so many sovereigns or bars. In practice it is not so used, with most people preferring to know the price or value of things in dollars or pounds.

There is estimated to be around 190,000 tonnes of gold above ground, largely held as adornments or as bullion in bank and exchange-traded fund (ETF) vaults. Each year, mining new adds maybe 1.5% to the stock, whilst recycling can direct old gold to new buyers in new shapes and uses. The growth in the stock of gold is usually below the growth rate of the world economy, creating some scarcity.

So why do people hold gold as an asset?  It is a rare metal associated with wealth. Because it is soft it has little industrial use though some technological applications now deploy it. It is mainly used for jewellery, for the adornment of buildings and as gold leaf in a range of functions. In the last six months demand for gold for jewellery halved as lockdowns hit discretionary shopping and events such as weddings.  This should start to pick up as governments relax controls. Indian and Chinese demand is particularly important, accounting for around half of the total.

Central banks hold gold as part of their diversified reserves. Traditionally the US, Germany, France, Italy and Russia like gold. China has been building its stocks progressively as her surpluses have grown. In the last six months of rising and high gold prices, central banks have cut back on their purchases, which fell by 39% to 283 tonnes. It is one of the paradoxes of the paper and digital-currency era that the creators of the new money feel the need to hold some of the old they have replaced.

Record year

So, why has the gold price been so strong in the last half year? The demand has come from investors who have decided gold is a great safe haven in troubled times. Gold ETFs have added 899 tonnes of gold to their total holdings this year to end July as more buyers have emerged. This demand is around one fifth of annual production of newly mined and recycled gold, and has been sufficient to push the gold price to a new high.

People have been persuaded to buy, as bonds offer low returns with negative yields after allowing for inflation. The opportunity cost of holding a non-income bearing asset has just got a lot lower. Some buy gold fearing that the creation of so much additional digital and paper currency by central banks to sustain their bond-buying programmes heralds a further loss of value by traditional currencies in the months ahead, as markets think about the full meaning of all that extra money that has been created. The new owners of gold hope this will be one of those times when gold reverts to being “true” money that holds its value when common money inflates all around it.

A little bit of gold can add a bit of glitter to a portfolio in what might be pre-inflationary times. It is a true diversifier, which can sometimes defy falling markets when they are gripped with fear, and which might offset inflation if the major currencies become more debased.

Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.

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