Why I’m still backing gold

I’m still holding gold. Bill Bonner is still holding gold. So are Tim Price, John Stepek and most of the sensible people we know.

But does it still make sense? A recent convert to the idea is Financial Times star columnist Gillian Tett. She recently spoke to former Federal Reserve chairman Alan Greenspan. He carefully avoided talking about gold while he was running the global monetary system – but these days he is a little more open about his views. There is a reason, he says, why investors and central banks “put money into an asset that has no rate of return”. It is that gold is “by all evidence a premier currency. No fiat currency, including the dollar, can match it.”

Gillian gets this idea. She sees how the “sheer scale of recent monetary policy experiments has raised concerns about a future outbreak of inflation” and she understands that for ordinary people who “have no idea what central banks are really doing (or) how money works in a bottomless cyber space”, gold seems “tangible clear and finite… creating an impression of permanent intrinsic value”.

But she also sees something very important that others tend to miss in the argument about gold. It might be useless in practical terms (another FT columnist called it “basically pointless” this week). But global social convention and culture give it huge value: in times of stress people rush to gold.

This is a subject I brought up with this week’s interviewee, Russell Napier (watch the video here). He does not believe that the outbreak of inflation Gillian refers to is imminent. Instead, he firmly believes that we are living in a dangerous era of deflation.

So does he hold gold? “Just a little bit,” he says. But he is watching it very, very carefully. Why? Because at some stage, when it is clear that monetary policy can’t create the inflation needed to push down debt and create growth, “we get something else”. It is hard to say what that something else will be, but it will involve some sort of government activism, perhaps even a return to exchange or capital controls. That’s the point at which people could begin to believe that “the government is in the business of confiscating their assets”.

If that becomes a prevalent view, it is “likely that the gold price would go up” as people try to find a way to protect those assets.

The interesting thing here is Russell’s assumption that it is gold people will buy when they get nervous about politics (as people in the UK should be right now). It is exactly the same assumption that Gillian and Greenspan both make. And its likely to be the correct one. Culture, as Gillian says, “is a very powerful thing, especially in a world of finance that is rushing more deeply into ethereal cyber
space every day”.