Not long back in the global history, aluminum was thought to be
more precious than gold. Most powerful kings were served food in aluminum
utensils while the lesser knights had to do with gold flatware. The sudden
change in the value of aluminum took place when much cheaper means of refining
the ore became available. Suddenly, it was disposable – as in aluminum foil or
cola cans. In no time it transformed from most expensive thing in the world to
garbage. Similarly, in African continent for long common salt remained a more
prominent store of value and medium of exchange than gold. For past two
centuries though gold has been globally preferred as a store of value over
another commodity, primarily for its limited supply and physical traits that
make it indestructible. However, in past four decades, the demand of gold for
storage of value, vanity, social & financial security, and religiously
important object shall has diminished. In my view, there is no reason to
believe that this trend will reverse in foreseeable future.
Gold phasing out of cultures
I strongly believe that when economics fails in providing
solution to the problem of livelihood and sustainability, philosophy provides
the answer. It is a natural instinct of human being to look up to the skies for
guidance when all our efforts fail. (Some even do so without making any effort
at all!) Religion has therefore been an inextricable part of human life since
beginning of the civilization and has grown with the growth and expansion of
the global trade and commerce.
Most ancient cultures, China, Egypt, Mesopotamia, Indus Valley
etc. have believed in continuation of life after death. Gold being an
indestructible (and therefore sacred) object had always been an important part
of their religion, culture, traditions and beliefs.
However, the factors like popularity and spread of technology in
common man’s life; rising fascist and communist tendencies due to worsening
socio-economic disparities; rise in electronic transactions (personal, social
and commercial) thus lower risk (less travel, less physical transactions &
deliveries); emergence of new articles of luxury to serve the vanity needs of
the affluent; stronger and deeper social security programs; demise of monarchy;
spread of spiritualism; dissipation of church & temples, etc., have
resulted in diminution of traditional demand and pre-eminence of gold.
In the modern context, technologically challenging things, e.g.,
Crypto Currencies, have more potential to attract peoples’ fancy as compared to
gold, I feel.
The spread of radical Islamic forces is the only factor that
somewhat weakens my conviction in decline of gold. But the way, the global war
on radicals is progressing I am sure that in next decade or so we shall see
this concern easing materially and then gold may decline rather precipitously
in value.
Gold relevant today...
However, the demand of gold as store of value is a deeply
complex matter. In past gold had been a preferred asset to store value both
during economic as well as political (including geo-political) crises.
Gold has served as reserve currency whenever the paper
currencies have lost faith of people due to a variety of reason, particularly
high inflation and/or fiscal profligacy. It has also been used as such during transition
periods in global strategic power equilibrium.
However since end of Breton Wood agreement in 1971, gold has not
been used as reserve currency. In post Berlin Wall (1989) era the strategic
supremacy of USA, and consequently USD, has remained mostly unchallenged.
In past five decades post Breton Wood, there have been two
instances of global financial crisis. In 1970s the world faced serious
stagflation as the demand generated by post WWII reconstruction activities
faded and Iranian revolution created a worldwide energy crisis. Gold jumped 10x
in real terms during the decade of 1970-1980), to give back most of the gains
in the following two decades. Again in the decade of 2000s, as the dotcom
bubble hit the global economy, interest rates crashed leading to sub-prime
crisis that culminated in a major global financial crisis. The gold jumped 5x
in real terms during this decade (2001-2011).
Gold is still down about 10% from its 2011 high. But given the
negative rates in large economies like EU & Japan and near zero in US;
persistent deflationary pressures despite unprecedented and obscene amount of
money printed by Central Bankers; poor economic growth outlook; and war like
situation in global currency markets – the gold is reemerging as a favorite
asset to store value.
...but not the endgame
The socio-economic disparities are rising in the developed world
at a pace unprecedented in the economic history. The situation in my view is
likely to materially worsen in coming years. Inarguably, the so-called unconventional
monetary policies followed by the central bankers own the primary
responsibility for this phenomenon. With an overwhelming US$15-17trillion worth
of bonds, many of which are 10-30year maturity, are yielding negative return at
this point in time. Many more promise to return no income to the holders. Poor
savers and pensioners who mainly rely on their savings for their livelihood are
stressed like never before.
Large economies like Japan and EU have mostly failed in their
vigorous efforts raising inflationary expectations in their respective
economies. There is therefore little incentive to invest in these economies.
The employment opportunities are therefore are not likely to rise in any
sustainable manner. We have already seen the unsustainability of one decade of
job gains in US. All jobs created in 2009-2019 have evaporated in just one
month of lockdown.
There is no dearth of experts who have written about the endgame
of the current monetary policy practices. Most of them suffer from historical hindsight
and extrapolation of current trends. Being no expert of global economics and
monetary system, I can afford to conveniently break from the empirical
experience and think freely. I believe the endgame will mark a watershed in
global economic history - among other things, many systems will become
redundant; many currencies will cease to exist; and monstrous debts will be
written off the books. It is difficult to fathom that this task can be achieved
under the current democratic system. Communism will therefore make a grand
entry sometime in next one decade, may be in a new format.
A large number of analysts have forecasted that gold will be a
preferred currency of the world amidst all this chaos. I beg to disagree. In my
view, presently the interest in gold appears to be more intuitive rather than
analytical. It is being presumed that the end game of the non-conventional
monetary policies currently in practice will be prolonged stagflation, complete
disintegration (or euphemistically restructuring) of the present monetary
systems where USD may longer be the sole reserve currency and near complete
erosion of savers’ financial wealth.
I find most of the current analysis suffering from some degree
of cognitive dissonance. It is trying to dress a trading opportunity into a
secular trend. I do not see any reason why gold should ever touch its 1980 high
in real terms and why not go below its 1971 lows (in real terms).
Equity investment strategyContinue to focus on a mix of large and mid cap stocks, with decent liquidity, solvency ratios and operating leverage.