By Paul Moroz
In times of economic uncertainty, the decades-old debate surrounding investing in gold inevitably resurfaces. For example, as the world awaits the still unknown consequences of the Brexit vote, many nervous investors may be tempted by the lure of gold—that mythic yellow element that has captured the psyche of mankind for millennia. Lest we forget the cautionary words of J.R.R. Tolkien, All that is gold does not glitter, it is worth considering the often illusory and provisional qualities of gold. Despite being the most popular of all precious metals as an investment, there are several reasons why we at Mawer do not invest in gold.
Our main concern with gold has always been valuation. Historically, it has served as a medium of exchange and a store of wealth. It’s not the original medium of exchange—many things have been used as money throughout civilization, from seashells to giant obelisks—but gold, perhaps more than anything, has long stood as the universal symbol of wealth. Today we’re seeing another evolution in money in various cryptocurrencies such as bitcoin. It raises the same fundamental question that gold does: what is it really worth? Whatever the valuation, just as with gold, it’s always speculation.
The appeal of things like gold and bitcoin may stem from the idea that they are inflation-proof because they’re not controlled by some other party that could produce more quantities of each at any given time. That would be the knock against many of the current fiat systems; central banks can print money and deflate its value, thereby decreasing its purchasing power. That’s a good reason not to keep physical money under your mattress—it will have less purchasing power with the passage of time.
But gold’s price—like that of any other precious metal or commodity—can fluctuate dramatically. The decline in the price of gold from more than $800 per ounce in the 1980s to less than $350 per ounce in the 1990s is a well-known example. But the most significant variable influencing gold’s price is the amount of it held by the world’s central banks. According to the World Gold Council, as of 2011, central banks collectively held approximately 17% of the world’s gold and have continued to amass it at record rates. And the central bank gold holdings are significantly higher than annual demand—if they were to sell, it could overwhelm the market. This represents a big demand/supply imbalance.