What’s going on with gold?

Marketwatch has a confession; he really does not know a lot about gold.  His knowledge is largely confined to see it on his beloved spouse’s neck and fingers, accompanied by sparkly stones which, both he and his banker, have been promised they are real.

The other thing he knows is that there is a lot of gold sitting in a place in the US called Fort Knox.  After all, haven’t we all seen Goldfinger?  Fort Knox houses about 147 million ounces of gold.  That’s about 4.2 million kilos of the stuff and it’s worth roughly US$190 billion.

A lot of gold isn’t actually used. Each year global mining adds 2,500-3,000 tonnes to the existing stock. Around the world there is about 187,000 tonnes of the stuff.  Most of it comes from China, South Africa and Australia.  So what is used for?  If we look at this chart we can see that 37% of it is held by central banks and investors.  The approximate value of the investors share is US$1.4 trillion.

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By anyone’s measure, that’s a decent size investment.

But gold doesn’t provide a regular income, it isn’t a currency (although it used to be the backing for currencies) and it’s really difficult to do your weekly shopping by paying with gold at Coles.

The reality is that gold’s value is social.  It is valuable because we all agree it has been and will be in the future.  When the wheels start to fall off an economy, investors pile into gold because we all agree it’s valuable and is a safe asset.  If disaster strikes, such that paper money and the system that supports it no longer exists, we will in all probability revert to gold.

The price of gold hit a record in early August at US$2,074 per ounce but has since dropped to US$1,968 at the time of writing this.  This jump in prices cannot easily be explained.  As we have noted, gold is usually seen as a safe haven when stock prices are falling or inflation is rising.  Neither of those two things are happening.  Some experts have suggested that geo-political tensions, particularly between the US and China, are the cause.  Others think it might be the pandemic, but the upward movement started before that.  But there is no consensus and right now nobody is quite sure.

This is important as this chart of gold prices shows:

Pic Vba Marketwatch Gold Price Ab1 9 2020

If you held your gold for the entirety of this 20 year period, your investment would have appreciated by 609% (not adjusted for inflation).  This is a good return.  But along the way you would have been underwater for many years and would have shown a small return for many others.  In other words, you would have been on a rollercoaster.

The current price would normally be telling us that the end of the world is nigh.  But remember, it’s at that price because not only has someone sold it but someone else has bought it.  Marketwatch is assuming that the people buying expect the price to go higher.  Alternatively, they might just enjoy the fun of the fair on that rollercoaster.  Or they are completely stupid.

So what do we have?  Well, we have a metal which relies on our collective perception for its value, behaving in a way we don’t fully understand, pointing to an Armageddon that doesn’t appear to be materialising, even if times are tough.

This is not a market for the faint-hearted or the novice.  It is high risk and demands a similar level of sophistication.  Which way will prices move?  It’s anybody’s guess.  Marketwatch feels another sparkly investment coming on.

For the monthly wine collection, we are very close to home.  Marketwatch and his dear wife enjoyed a day recently pottering around in the Swan Valley dampened only by a speeding ticket on the not-so-Great Northern Highway.

We would both like to offer our congratulations, in no particular order to:

And they are only on our doorstep.

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