Year to date, the price of gold has climbed over 16% in US dollar terms – and our view on the use of it within an investment portfolio has not significantly changed. Much of the polemic surrounding gold involves a comparison with other assets such as equities. The inference is that if you are pro-gold, you are anti-stocks, anti-innovation and anti-prosperity.
We see gold as a non-yielding real asset that should act like a ‘safe-haven’ currency to paper-based ‘fiat’ money. We do not think gold should be grouped with other commodities that are consumed to create economic activity. It’s the very fact gold is not used like other commodities but accumulates gradually over time without degrading (it has a high stock-to-flow ratio), that lends it the ability to be a monetary unit. This relatively low and stable production growth when compared to paper money confers gold some ability to appreciate over time.
In an environment of increasing paper currency devaluation denominating a portion of a portfolio in a monetary asset outside the current credit driven financial system can aid diversification. Indeed, with cash rates below zero across many major economies storing gold in vaults ‘costs’ relatively less. It is worth remembering that although gold is no longer used to back currencies, nation states continue to hold it as part of their reserves as long-term financial insurance. As such it doesn’t seem unreasonable to us to do the same.
Suzanne Hutchins, Newton – a BNY Mellon company