Back in Roman times, an ounce of gold bought 300 loaves of bread, roughly the same as it does now. Two ounces would buy you an acre of the best farmland in Alberta in the 1930s; incredibly, it could do the same until very recently. It was this capacity for holding its purchasing power and moving in the opposite direction of other asset classes that long made gold the ultimate safe haven, something investors going back five centuries to Jakob Fugger the Rich have recommended one hold in one’s portfolio.
Only gold has turned out to be a terrible hedge this year. Amid the worst market volatility since the Great Recession, it’s fallen in value along with stocks and bonds. A growing number of prominent investors are concluding the yellow metal has lost its status as a go-to asset in times of trouble—perhaps for good. Even some long-time gold bugs are beginning to have doubts. “Gold has been dead since November of 2011. If you’ve owned gold in [U.S.] dollar terms it has been a terrifying trade,” admits Dennis Gartman, the Hong Kong–based publisher of The Gartman Letter.
“Gold today clearly has lost its lustre,” says Angus Watt, managing director with National Bank Financial. He notes how, in the wake of the 2008 financial crisis, the safe haven has proven to be U.S. treasuries and U.S. currency. And those will be the assets investors will gravitate to the next time a crisis hits, he says.
“Gold today is nothing more or less than a commodity, and we could have a debate whether it’s a commodity or a currency without an interest rate,” Watt continues. “People don’t choose between the U.S. dollar or gold; it’s the U.S. dollar or the euro. Gold today is no more of an alternative currency to global traders than the Canadian dollar is.”
Gold as just another commodity should be a scary prospect for its holders, in that it doesn’t get consumed like oil or soybeans. Only about a third of what’s produced by the mining industry is used for jewelry and industrial purposes. The rest just sits in vaults and safety deposit boxes. Should bullion’s holders decide to shift to a different asset class instead, even gradually, its value will continue to erode.
Furthermore, gold produces no income and can’t be improved with additional investment, which is why famed investor Warren Buffett has always avoided it. The Oracle of Omaha once noted you could either have the world’s gold supply, worth US$9 trillion to just sit there, or use it to buy all 400 million acres of farmland in the U.S. plus 16 Exxon Mobils, producing a substantial cash flow.
One obvious reason for gold’s decline when in the past it might have risen is America’s unconventional monetary policy. Ever since the gold standard was abandoned, the precious metal has traded inversely to the U.S. dollar. Its value soared with the expansion of U.S. money supply in the decade leading up to 2011, when it peaked at US$1,918 an ounce. But now the Federal Reserve’s experiment in quantitative easing has run its course and the central bank is expected to begin raising interest rates, making the greenback more valuable. Gold fell again in September, to US$1,130, when Fed chair Janet Yellen said a rate hike was likely before the year’s end.
Further, China’s devaluation of its currency, the renminbi, in August and imposition of investment restrictions made people in the country—which has long vied with India as the top physical gold market—less able to buy gold. Scotiabank reported the sentiment for bullion and gold equities at the Denver Gold Forum in September was as muted as in 2000, when gold cost US$300 an ounce.
Other asset classes, moreover, are increasingly competing with gold (and treasuries, for that matter) for people’s just-in-case money. Laurence Fink, CEO of BlackRock Inc., the world’s largest investment firm, caused a stir earlier this year when he suggested in a speech that people are opting for contemporary art, Bitcoins and especially apartments from London to Vancouver as a safe store of wealth in the place of gold. Watt agrees, saying: “If you’re talking about somebody in Hong Kong or China or Eastern Europe, then real estate in London, New York, L.A., San Francisco, Vancouver or Toronto is a good option. Not only are they buying a hard asset, but they’re buying something to protect the currency value.” On the Toronto Stock Exchange, the real estate index has outperformed the gold index for the past 27 months, he notes.
There remain those loyal to gold, of course, and the history of investing is littered with failed ideas rooted in the premise that this time it’s different. Veteran gold investor Eric Sprott, a major shareholder in BitGold, a gold-powered payment variation of Bitcoin, argues that gold’s challenge going forward in serving as a safe haven is its rarity—the physical inventory available for delivery on the Chicago Mercantile Exchange is a mere five tons. But that doesn’t portend any price diminution—quite the opposite. Says Sprott in his blog: “The demand numbers I’ve seen are way beyond the supply. So far, everyone in the press is downplaying gold but I haven’t lost any conviction.”
For more than a year, Chuck Jeannes, CEO of Vancouver-based Goldcorp—the world’s largest gold miner by market value—has posited his “peak gold supply” theory. As Jeannes knows from experience, it takes an average of 20 years to bring a gold discovery into production. As it happens, 1995 was the peak year for gold finds. Even with the appreciation since, the industry has not been able to find more gold. As a result, “our industry is never again going to mine as much gold as we do this year,” he told a conference in January.
That gold is in limited supply, though, isn’t really in question. Its future rests on the demand side—whether investors will continue to want it as a part of their life savings.
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