You would expect Hambro, a self-confessed gold bug and who has presided over a string of gold mining ventures, to talk his book. But lots of others are plainly thinking in the same terms. It is now relatively commonplace among the super-rich to have at least some small part of their wealth diversified into gold.
Call it an insurance policy against “when money dies”, the title of Adam Fergusson’s brilliant history of the Weimar hyperinflation. Few serious economists would think a repeat of this monetary meltdown remotely possible in today’s advanced economies, all of which have strong institutional frameworks to keep inflation in check. But more or less everywhere, currency debasement is now rife to help pay for the burgeoning costs of the COVID-19 crisis and that’s set alarm bells ringing.
Already we are seeing some loosening of inflation targeting regimes, not least by the Federal Reserve in the United States, which last month announced that full employment objectives would hitherto take priority, and that in future it would be targeting “average inflation” rather than a rolling target. This would allow inflation to run somewhat above target for some period of time without necessarily triggering an interest rate rise. Crucially, Jay Powell, the Fed chairman, failed to specify the time frame for such averaging, which would, theoretically, allow him to pull off the same trick as that of Gordon Brown with his notorious fiscal rules. In Brown’s case, the aim was to balance current spending across the cycle. By constantly extending the expected length of the cycle, the politically difficult task of bringing spending and taxes back into balance could be put off indefinitely. As we know, that didn’t end well.
Nor is it just the wealthy who are using gold as a means of hedging themselves against a devalued dollar. The Chinese authorities have been steadily increasing their gold reserves for some years now, resulting in a massive transfer of the metal from West to East. Over the past twenty years, China’s gold reserves have risen five fold in volume terms to 1948 tonnes at the last count. Their value is still dwarfed by China’s stock of US Treasuries, but the gap is narrowing fast.
But unlike silver, gold doesn’t oxidise, its value to weight ratio is far higher, making it less costly to store and transport, and it maintains an abiding allure and mystique across cultures that no other metal can command.
That China appears to view gold as a more dependable bet than US government debt shouldn’t altogether surprise, given the massive build-up of US indebtedness. A further $US1 trillion of fiscal expansionism is now only weeks away from Congressional approval, much of it likely to be financed by Federal Reserve money printing.
Britain still owns 310 tonnes of the stuff, hoarded away in the Bank of England’s vaults. Yet it might have been so much more, but for Brown’s turn of the century determination to diversify away from the “barbarous relic” – as John Maynard Keynes famously called the precious metal – into a basket of fiat currencies. This certainly helped rescue a number of banks from ruinous short positions in the metal, and China substantially to expand its own reserves at what later proved to be knock-down prices, but at considerable cost to the nation’s wealth. The loss on the sales when judged against today’s elevated price is around £10 billion – a somewhat expensive misjudgment it might be said.
Actually, it is not quite as bad as it seems, because gold carries no rate of interest. Compounded interest earned on alternative securities considerably reduces the notional size of the loss. That’s another reason gold has come back into favour. When all money has become essentially free, perennially incomeless gold is as good as anything.
And to be fair, Britain wasn’t the only country flogging off its gold reserves at that time. Australia, the Netherlands, Belgium, Argentina – many countries adopted the same millennial view that gold was history, with little or no place in the globalised monetary system. On one level, they were, I suppose, right. It would be virtually impossible for today’s world to return to the gold standard, even if tying countries into what would in effect be a fixed exchange rate regime was any longer thought a good idea. If we think of the euro as one such gold standard-like reincarnation, we can begin to appreciate gold’s flaws as an international currency.
Whatever; the fact is that gold tends to sustain its value over time. National currencies, eroded by inflation and political manipulation, do not.
As it happens, gold is not the world’s oldest currency. That’s silver, for which in 30 pieces Judas Iscariot betrayed Jesus Christ. But unlike silver, gold doesn’t oxidise, its value to weight ratio is far higher, making it less costly to store and transport, and it maintains an abiding allure and mystique across cultures that no other metal can command.
As I say, a rising gold price reflects, above all other things, a loss of trust in the value of fiat currencies, for which there is good reason right now. But for the metal to really come into its own requires a prolonged period of relatively high inflation, similar to what occurred in the Seventies after the US came off the gold standard and president Nixon effectively opted for money printing and inflation over tax rises to pay for the Vietnam war.
For the moment, the presiding consensus view remains the opposite – that we are heading into a great deflation. I’m not so sure. The least painful way of dealing with a big debt overhang is to inflate it away. Who knows; the gold bugs might actually be on to something.