A report into attitudes towards owning gold bullion posed the following question: ‘What are the reasons for the continued sceptical attitude towards gold?’
There were three key answers:
- Gold is considered a ‘barbarous relic’
- It’s considered expensive to buy – or highly speculative
- It’s confronted with the ‘normalcy bias’
The report pointed towards a positive future for gold as an investment tool. Yet, it also noted that the metal still needs to overcome its status as an investment tool for cranks, weirdos and old fashioned investors.
So how did gold get its reputation in the mainstream as a ‘barbarous relic’?
John Maynard Keynes is often credited with the term. But in actual fact, he wasn’t referring to gold directly, but rather the gold standard.
The reference to gold dates back further, to 1894 when a Tennessee merchant told the US Senate that, ‘Gold is a relic of barbarism and should be discarded by all civilized nations as a medium of exchange.’
No doubt that was just what the Senate and future US central bankers wanted to hear.
In 1946, the Bretton Woods agreement enabled a fixed exchange rate. It meant that you could exchange your US dollars for gold. The going rate was $35 per ounce for several decades. President Richard Nixon ended this system in 1971. From that point on, only faith in the American government was behind the greenback.
And what happened to gold? Soaring inflation (around 11% by 1979) enabled gold to rally over the next decade from $35 an ounce to more than $850 an ounce.
As the decadent eighties rolled in, all sorts of fancy financial tools were developed. These were the investing tools for the modern man. You could leverage yourself to the eyeballs.
After all, why buy something as simple as gold when there are complicated financial tools like swaps, futures, options, Forex, warrants, bonds and stocks to invest in?
This has led the modern man, with all his fancy financial products, to sneer at gold investors. He sees them as people who refuse to move with the times. The sort of people who were most likely your Great Depression surviving grandparents.
Gold’s a Relic…For Old Timers
So it’s not easy to change gold’s image from a ‘barbarous relic’ to an investing tool. And it’s made harder when today’s investing ‘gurus’ slam it.
Take this, from a speech given by billionaire investor Warren Buffett in 1998:
‘[Gold] gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.’
11 years later, when the gold price had risen from $350 per ounce to $850 an ounce (a nice 142% gains), did Buffett change his tune?
No. He didn’t. In fact, when a CNBC reporter asked where the price of gold was going and if it had a place in value investing, he said gold does nothing but ‘…look at you’:
‘I have no views as to where it will be, but the one thing I can tell you is it won’t do anything between now and then except look at you. Whereas…Coca-Cola will be making money, and I think Wells Fargo will be making a lot of money…it’s a lot better to have a goose that keeps laying eggs than a goose that just sits there and eats insurance and storage and a few things like that.’
Since Buffett said that gold would do nothing between ‘now and then except to look at you’, the spot price has risen 84%.
But what about Coca-Cola [NYSE: KO] and Wells Fargo [NYSE: WFC]? Seeing as they were Buffett’s choice of investment at the time. Coke’s up 73% and Wells Fargo is 24% higher since then…
Click here to enlarge
It’s not a bad return for either Wells Fargo or Coca-Cola. But it’s not as good as an 84% return.
Gold is Too Expensive
Shares in Coca-Cola are trading at USD$77.55. Does that sound like a good price to you? Well here’s the thing, for one ounce of gold at roughly USD$1,570, you’d get less than 21 Coca-Cola shares.
What do you actually get with the Coke stocks? A bit of paper that says you own a tiny smidgin of the company. You and about 9.2 million of your closest mates.
And here is one of the crucial differences owning shares versus gold. You’re at the mercy of company management.
At any time company management can dilute the value of your shares by issuing more. When that happens, if you want your shares to have the same value as previously, you have to buy more.
But with gold, no one can touch it. As in, the metal is ‘outside’ the financial system. No matter what central bankers do, they can’t fiddle with it. A corporation can’t water down the value of your gold by issuing more. It’s a finite resource. It’s a store of value. It’s a tangible asset. No one has yet found a way to create gold from thin air.
And yes, it’s pretty to look at.
Gold’s Not ‘Normal’ – It’s An Investment Only For Cranks
Times have changed. The thing is, owning gold is becoming normal.
Just recently, on a construction site in Melbourne, a few electricians were talking about how to best store their cash (they’re tradies after all). As they ate their meat pies and drank their cans of Coke, one of the sparkies’ said to Mr Smith, ‘Hey, can you get your wife to call me? I want to buy some gold but I don’t know where to start.’
No longer is the yellow metal only for the ‘gold bugs’, old timers and the rich…
But the changing attitudes over gold go deeper than a couple of tradie’s chatting over a smoko. Things are slowly changing at the big end of town too.
China is developing its own internal gold market.
According to the Financial Times: ‘China is set to launch interbank gold trading at the end of next month amid a broader set of banking reforms… A spokesman for the Shanghai Gold Exchange confirmed that the exchange “has this plan” to create an interbank gold market and was working with other government agencies to do so…’
Why would China want to enable gold trading between banks? Could it be because China wants to use more gold in their banking system?
Greg Canavan, editor of Sound Money. Sound Investments, has followed the China-Gold story for quite some time. In a recent report he wrote:
‘In 2007, China became the world’s largest gold producer. And by 2011, it produced 355 tonnes of gold… not one single ounce of China’s new supply made it to the global gold market.’
Greg sees this latest move by the Chinese government as a clear sign that ‘…the Chinese government is determined to make gold a much bigger part of their financial strategy in the coming years.’
China creating their own interbank gold market is just the first step of asserting their new found dominance of the gold market (China accounted for a quarter of global gold demand during the first three months of this year).
This move by China could be a big deal for the gold market, and it’s bound to have an impact. If you want to find out more about how Beijing is re-writing their own rules and the role gold will play in the kingdom’s survival, click here.
Editor, Money Weekend
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