Gold Is More Than Just A Metal

The one investment that draws immense controversy is gold.

In 2012, I came across two views on gold in the media that gave me a fresh perspective on the yellow metal as an investment.

The First: Gold Is A Non-Productive Asset

Warren Buffett explained his stance in a Fortune article in 2012 (reproduced below), by categorising investments into three classes:

• Currency based

• Productive assets (businesses, farms, real estate)

• Non-productive assets (art, gold)

Non-productive assets are purchased with the buyer’s hope that someone else will pay more for them in the future. Owners are not inspired by what the asset itself can produce—it will remain lifeless forever—but rather by the belief that others will desire it even more avidly in the future.

Gold has some industrial and decorative utilities, but the demand for these purposes is both limited and incapable of soaking up new production.

Cube A: Today (2012) the world’s gold stock is about 170,000 metric tons. If all of this gold were melded together, it would form a cube of about 68 feet per side. At $1,750 per ounce (2012 price of gold), its value would be about $9.6 trillion.

Pile B: At $9.6 trillion, we could buy all US cropland (400 million acres with output of about $200 billion annually), plus 16 Exxon Mobil shares (the most profitable company earning more than $40 billion annually). After these purchases, we would have about $1 trillion left over for walking-around money.

A century from now, the 400 million acres of farmland will have produced staggering amounts of crops and will continue to produce that valuable bounty, whatever the currency may be. Exxon Mobil shares will probably have delivered trillions of dollars in dividends to its owners and will also hold assets worth many more trillions (and remember, you get 16 Exxons). The 170,000 tonnes of gold will be unchanged in size and still incapable of producing anything. You can fondle the cube, but it will not respond.

Admittedly, when people are fearful, it’s likely many will still rush to gold. I’m confident, however, that the $9.6 trillion current valuation of Cube A will compound over the century at a rate far inferior to that achieved by Pile B.

The Second: The Historical Attachment To Gold

David Tuckett, an expert in Economics and Psychoanalysis, and a Fellow of the Institute of Psychoanalysis in London, discussed gold in an interaction with Wall Street Journal in 2012. He explained that there is a cognitive and emotional narrative that surrounds gold as an investment. It has a deep meaning and fundamental connection for most humans, based on a shared consensus about its attractive element and acceptability.

As it has been prevalent in all human cultures dating back millennia, you cannot talk of gold and ignore critical components of human psychology. Undoubtedly, gold has a monumental history with mankind. Descriptions of it appeared in hieroglyphs as early as 2600 B.C.

When King Amenhotep III ruled ancient Egypt, it became the richest and most powerful nation on earth. The letters sent and received from pharaoh’s court showed the kings were willing to trade their daughters for gold. One of them is to have said, “In your country gold is like dust and you can just gather it up. If it is your intention that a sincere friendship exists, send much gold.”

In 2019, two large tombs were excavated at the ancient city of Pylos in southern Greece. Inside the 3,500-year-old tombs, archaeologists found remains of gold jewellery and thousands of pieces of gold foil, remnants of the sheets of gold that once lined the beehive-shaped tombs. It is a symbol of eternity lining coffins or tombs, and the walls of the vaults of central banks.

Psychiatrist Dale Archer, who discusses markets and human behaviour, in a 2013 Forbes article wrote about how the Chinese have always bought and held on to as much physical gold as they could afford. Forced to flee their villages and homes by famine, war, and constant government repression, gold was the only thing they could take with them.

In the book, The Great Partition: The Making of India and Pakistan, by Yasmin Khan, a Sikh woman Taran relates how her mother took all the gold and tied it in handkerchiefs, and distributed it among different family members for safekeeping. “We did not know where each of us would end up; this gold was our security,” she explained.

Gold As An Investment

So when the debate on gold as an investment arises, it is not as simple as it seems. It has multiple identities and functions, and layered nuances that go into its timeless allure.

Mankind’s love affair with it over millennia has resulted in a psychological attraction. This is why the perception of an investor buying gold could be different when other investments are considered. An investor knows that he will have to pay an insurance premium if he chooses to insure the investment. He will not get any dividends or interest. The money he gets while selling will depend on how much it costs at that time. There is no intrinsic worth as one can arrive at when evaluating a business and its listed stock price. But, this is gold.

So, if you are considering buying gold, you must ask yourself the narrative that is framing your point of reference.

• Fear: What are you afraid of? Social unrest? Civil uprising? War? Recession? Global market downturn?

• Hyperinflation: In such a situation, it is smart to preserve your money in gold.

• Currency Hedge: The price of gold is determined in international markets and converted to the price offered in domestic markets (INR). If the INR depreciates vs the USD, the price of gold in the domestic market would rise.

• Short-term bet: Do you believe that you are well-positioned in the gold cycle to take a tactical bet and exit when you make a tidy sum? If yes, what is the absolute return you are looking at?

• Long-term bet: Are you buying it to pass on to the future generations?

• Adornment

• Portfolio Diversifier

Now, you will be able to figure out the form of holding. For example, jewellery is for adornment, but a bullion bar would be for fear of social unrest. Do you want to pass down jewellery to your grandchildren or bars? If it is a tactical bet, would a gold ETF do?

Start with why you are buying, and the decisions of when and what to buy will follow.

The Multiple Identities Of Gold

• It shares commodity characteristics with other metals and has industrial uses.

• Held by central banks, it boasts of a clear monetary identity. It was the most powerful representation of wealth when nations adopted the gold standard which directly linked the amount of a nation’s currency in circulation with the amount of gold held in reserve.

• It has always been a symbol of wealth and power.

• It is a store of value, a means of exchange, legal tender, and has facilitated global trade.

• It is used for adornment.

• It is a way to pass on and preserve wealth from one generation to the next

• It has been a go-to investment during times of fear and uncertainty. As Warren Buffet said, “Gold is a way of going long on fear.”

• It has a unique and appealing universal quality. If you have to flee to another city or country or continent, your assets and currency may lose all value, but not gold.

By Larissa Fernand, Behavioural Finance Expert