It is always nice when someone who probably shouldn’t be a gold bug turns out to be one. So I was pleased to see a note from SocGen’s Dylan Grice this week on the subject.
Dylan doesn’t approve of long-term investments in commodities: he considers betting on commodity prices to be a bet against human ingenuity. “Why should commodities provide investors with a real risk premium? Shouldn’t prices actually decline in real terms over time?”
“A bushel of wheat, a lump of iron-ore or an ingot of silver today is identical to a bushel of wheat, lump of iron-ore or ingot of silver produced one thousand years ago. The only difference is that they’re generally cheaper to produce because over time, human innovation has lowered the cost of production.”
So buy commodities for the long term and you are putting yourself up against “the relentless march of human progress.”
However, while we have proven ourselves to be pretty brilliant at passing down knowledge in the physical sciences and improving it as we go, the same cannot be said for our “social decision making” where “each generation is condemned to relearn the mistakes of generations past.”
The same goes for financial history. We don’t learn. We keep having bubbles and crashes. We keep creating credit crunches – “Tacitus refers to what may be the first in 33AD.” And we keep making our own inflation crises thanks to the fact that, while we know how they happen and how to prevent them, we still constantly find ourselves with their two preconditions – “financially pressured governments and the politicized issuance of money.”
Buying most commodities is to bet against human ingenuity. That doesn’t make sense. But to buy gold is to bet against “mankind’s ability to absorb wisdom” says Grice. It sounds harsh but we’re with Grice on this one. The main reason we like to buy gold at MoneyWeek is because we think it gives us some insurance against long-term human idiocy.