A Golden Opportunity?

Are we about to enter a new golden age where Keynes' 'barbarous relic' comes back into investment fashion

A Golden Opportunity?
Photo by Jingming Pan / Unsplash

In uncertain times, people often reject the experimental in favour of more proven options.

That means, what may have become unfashionable over time is suddenly back in demand. It's true of clothing, design, business and investment concepts.

It's the last of those that I want to focus on today.

Investment fads and manias come and go. The boom and bust cycles repeat because of the immutable characteristics of human nature and the fact that all markets are ruled by fear and greed.

Fear is a two way street. People are fearful of missing out or scared of losing money. Greed is more a one way path - people always seem to want more.

Those two emotions explain why so many people lose money through investing.

They buy and sell at precisely the wrong time because they make emotional decisions.

Hence no one wants to buy stocks (or other investments) during times of despair but everyone is an expert when things are booming.

Legendary investor Warren Buffett once said:

"Be fearful when others are greedy, and greedy when others are fearful.”

But Buffett has also been a vocal critic of one of the oldest asset classes in history - gold.

He refers to it as an 'unproductive asset'. That is:

“Assets that will never produce anything, but that are purchased in the buyer's hope that someone else — who also knows that these assets will be forever unproductive — will pay more for them in the future.”

Again, Buffett may be correct but his comments overlook the serious role that gold has played throughout history, both as money and a store of value, particularly during uncertain times.

Of course, critics will cite time periods where gold under-performs other asset classes. However, over the very long run, gold's purchasing power has been remarkably stable.

“With an ounce of gold a man could buy a fine suit of clothes in the time of Shakespeare, in that of Beethoven and Jefferson, in the Depression of the 1930s.”

Regular readers will know that I consider Bitcoin to be digital gold .

Critics of that position cite excessive price volatility as a justification to refute that but the following chart shows the gold price is volatile too, with major draw-downs of 80% or more.

Gold price adjusted for inflation. The grey bars are recessions. Prices in USD

The chart also shows that during periods of uncertainty, high inflation and a stagnant economy, gold tends to perform remarkably well.

Many are now agreeing with Confidential's previous prediction of stagflationary times ahead which supports the case for owning precious metals like gold and silver.

Sure, neither metal will 'produce' anything for the holder but it offers no counter-party risk either. Your ounce of gold will still be around next year and likely for thousands of years to come.

In that sense, they produce a modicum of certainty in an uncertain world.

The same can't be said of fiat currencies or stocks and bonds. All of them come and go according to the whims of markets ruled by human emotion.

In an uncertain world, these two 'relics of the past' offer a comforting surety that no matter how bad things may get, there are some things that will outlast even the worst excesses of humanity.

Of course the best time to buy almost any asset is when no-one else seems to want them.

In respect to gold and silver, that time has probably past but given the relative lack of interest currently, some may consider the next best time is right now.

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