Why gold doesn’t matter

Share

What better signal that financial bubbles are bursting than a sudden rush to sell gold? On Wednesday the price of gold fell for the 10th consecutive day, apparently the longest losing streak since 2000. The precious metal is at its cheapest in five years, falling to $1,092 (U.S.) per troy ounce on the Comex futures exchange and there are more funds with short than long positions, the first time since 2006, according to statistics from the U.S. Commodity Futures Trading Commission.

If their bets are right, the selling will continue and Goldman Sachs, falling out of love with its namesake, is predicting that the price will fall below $1,000 this year. It would continue the drift from gold's peak of more than $1,800 in 2011, and if you fancied yourself as a countercyclical investor you might wonder whether this was a good time to buy.

You should bear in mind that in 2006 the price of gold was less than $500. Its biggest gain occurred after the 2008 financial crash, which tells you a lot about this commodity. The important thing to understand about gold is that unlike oil, wheat or iron ore, it doesn't matter. Gold is the useless commodity; industrial applications account for less than a 10th of gold production and although half of annual output goes into jewellery, a great deal of that is hoarded in Asian countries where the custom of wedding dowries still prevails.

Gold has no intrinsic value. Even if you think of it as a financial asset, it is bizarre: It doesn't pay a dividend. People buy gold because other people buy it. It's like bitcoin, only nicer because it's pretty and you can wear it or hide it in your sock drawer. The other point about gold is that over recent history and until the financial crisis, it has been a fairly boring investment and my guess is it's about to go back to being dull and uninspiring.

The world seems to be going back to basics. Gold tends to respond strongly to monetary crises. It soared in value during the inflationary period of the late 1970s and then quickly collapsed. People (wrongly) assumed that gold was a natural inflation hedge but its latest surge occurred followed the financial crash when central banks, most noticeably the U.S. Federal Reserve, began to pump money into the financial system in order to prevent a catastrophic deflation and depression. Strong signals in 2013 of U.S. economic recovery have stemmed the gold rush, as have more recent hints from the Fed and from the Bank of England that interest-rate hikes are on the way.

Owning physical gold is a liability; you must pay people to keep it safe. So what is the point of owning a bar of useless yellow metal when you can buy government bonds that are both more secure and pay a regular coupon? Gold made sense when yields and markets were collapsing after 2007 but the temporary logic no longer holds. Some eurozone government bond markets, too, appear to be in bubble territory with negative nominal yields.

If we are moving into a more normal world where risk-free government debt pays real interest, what is the point of funny money, bitcoin or gold? The appeal of bizarre commodity assets, junk bonds and tech stocks with no prospect of profit or dividends will pall. The frantic search by pension fund managers for yield to balance their portfolios will dissipate and we will move back to a new normal. In investing terms, it will be back to basics.

Carl Mortished is a Canadian financial journalist and freelance consultant based in Britain.