“The following two articles on gold were written by The Meander Chronicle’s financial columnist William Meyer, CEO of Fenestra Asset Management – the first in November 2018, the second today. The former was, for many years, Meyer’s fall-back position on the precious metal, but amid the coronavirus pandemic his stance has changed. He explains the reasons in the latter article below.”

GOLD 2018

In conversations with clients, the question, “What about gold?”, is often raised. Unfortunately this is a fascinating but dangerous “red herring” that shifts focus away from the serious business of investing.

The question is interesting, though, as the gold price has fallen about 37% since peaking above $1,920 an ounce late in 2011. And is the current price of about $1,200 a good entry point for investors?

John Maynard Keynes, the great economist, in 1924 referred to gold as a “barbarous relic” and the world has surely moved on since then. You may or you may not agree, but certainly in terms of importance and size, the gold market is Mickey Mouse and completely dwarfed and overshadowed by the currency and bond markets. Gold does have a certain portfolio value for diversification and as a hedge against inflation and times of extreme political uncertainty.

The gold price peaked in 1980 at $800, which, adjusted for inflation, is equivalent to more than $2,000 in today’s money. So for investors just to break even after 36 years the gold price still has to jump by 70% overnight. In comparison, most stock markets are up by more than 500% over the same period. Gold was worth $20 an ounce in 1800 and that equates to a 2% annual return, but what about the costs of storing and insuring this gold for more than 200 years?

Gold is not a growth stock or a bond. It has no income, no dividends, no interest and no earnings. Buying gold is pure speculation. It has value only because people believe it is valuable. It is a collective hallucination.

The history of the gold standard, gold’s role in central banks’ reserves, its low correlation with other commodity prices and its price behaviour in relation to other currency movements tends to suggest characteristics more attributable to that of a special currency than that of a commodity.

Gold as a currency is unique, it is not tied to any one economy or government and it is safer from political and economic instability than cash.

Currencies are not investments in the true sense. Their roles lie in diversification, hedging and risk management in relation to other cash flows and these markets are often best left to speculators and traders.

Investment, though, is the deployment today of capital in expectation of a return of profits, interest, dividends and/or capital in the future. A true investment has a fixed and determined entry point and cost, repetitive and continuous weekly, monthly or annual cash flows which provide increasing purchasing power, i.e. adjusted for inflation real returns and a forecast exit level. These cash flows can then be adjusted for risk and inflation and a determination made as to whether it is a good investment opportunity.

In portfolio management everything depends on cash flows and in heightened times of uncertainty, diversification and balance become the investors’ best friends.

Gold remains a fine store of value, an inflation hedge, an insurance premium for political uncertainty, a currency hedge and a portfolio diversifier, but it is not an investment, not by definition and not by nature!

GOLD 2020

There is no permanent and perfect long-term investment medium in a bull-market trend. Conversely, there is no significant and important market (eg gold) that remains in the doldrums and stagnates permanently or exhibits a bear trend indefinitely.

The world order has changed.

Before Covid-19, the term “unprecedented” was cliché and over-used. Now, tragically, unprecedented does not even closely capture the extent of the wreckage the pandemic has wrought on the world economy.

In years past, when the American economy was growing strongly, investors would flinch at the massive increase in American debt, but still happily accumulate dollars and dollar assets. What happens when the economy suffers a destruction of possibly 40% of GDP? On top of this, to combat Covid-19 trillions more in debt will be accumulated. No one knows how this debt will ever be repaid, but some stark realities are crystal clear.

American dollars will not, for an extremely long time, earn a high rate of interest and the American government will not be paying back this debt in very scarce and valuable dollars.

I promise you, that in the days ahead, the politicians in Washington will stand up and say they are very much in favour of a strong dollar. Try not to die laughing (excuse the irony).

All this has profound implications for the price of gold.

The level of anxiety and fear in markets is increasing rapidly and the gold price is a barometer of fear.

Under this sad scenario, the importance of gold in portfolios will increase dramatically.

My advice is that clients quickly increase gold exposure and flee to safe-haven currencies such as the Swiss franc before the storm hits.

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