$300bn is tucked away in vaults in and around London—here's why it makes sense to invest in goldby Paul Wallace / February 19, 2018 / Leave a comment
Gold may no longer back currencies but it has lost none of its allure. Astronomers recently added fresh lustre when they revealed that colliding neutron stars—as well as supernovae—are the universe’s gold factories. Less exotically, the disclosure that $300bn is tucked away in vaults in and around London appealed to our inner gold bug. But does it make any sense to invest in gold?
Even when the gold standard prevailed in the late 19th and early 20th centuries, the case for investing in the precious metal was weak. Gold was certainly a store of value. But the very backing of currencies by gold ensured price stability anyway. And if prices were stable it made better sense to secure yield rather than to hold an inert hoard of gold. In Jane Austen’s novels, written while Britain was off gold during the Napoleonic wars, it was income such as Darcy’s £10,000 a year rather than piles of guineas that was seductive.
Britain went off gold for good in 1931, removing the link established by Isaac Newton in 1717 which Keynes had disparaged as a “barbarous relic.” The Bretton Woods system of fixed but adjustable exchange rates which came into existence after the Second World War retained a vestigial golden underpinning since foreign central banks could exchange their holdings of dollars for gold at a fixed price of $35 a troy ounce (set by Franklin Roosevelt in 1934). But that final tie was removed by Richard Nixon in August 1971 when he ended the convertibility of dollars into gold, creating the current system of floating exchange rates with no underlying anchor.
Since the early 1970s, the case for investing in gold has been quite different. Gold has essentially become a commodity play in a world of fiat money. Investors must bear in mind the underlying retail demand for gold as jewellery especially in China and India, the two biggest markets, and the supply of gold from the global mining industry. But most of all they have to weigh up the speculative arguments for an investment that offers no yield and incurs safekeeping costs.
Those arguments are twofold. One is to invest in gold as a hedge against inflation. If prices are surging, gold represents a store of value that cannot be eroded. As Peter Bernstein, an investor and financial historian, wrote in The Power…