Market focus: Deciphering the gold puzzle

Quid non mortalia pectora cogis, auri sacra fames ?  (To what lengths will man’s passion for gold not lead him?)

Virgil, Aeneid, 3.56-57.

The famous passage quoted from Virgil’s classical epic poem, the Aeneid, tells how Polymestor, king of Thrace, betraying the thrust of his friend, Priam, murdered Priam’s younger son, Polydor, in order to seize the gold brought with the boy from Troy for safekeeping. The mythological story of King Midas, who transformed in gold everything he touched, is another reminder that gold is a blessing that might turn into a curse. As scholar J.W. Graham reported, “the imperishability of gold combined with its high value in concentrated form, has always provided a convenient way of storing and transmitting wealth”. In Athens, a sculpture of Athena Parthenos, the goddess protecting the city, was decorated with over a ton of pure gold, worth more than $50 million in today’s prices. According to the Greek Historian Thucydides, the gold could be smelted and used as a final resort in time of state emergency, but it had to be restored in full as soon as possible.

Fast forward to the XXIst century and it seems that the fascination for gold as a store of value, both in good times and in bad times, is as important today as it was 25 centuries ago. Two world wars, the collapse of the British colonial empire and the Vietnam war led to the abandon of the gold standard and of its post-1945 ersatz, the gold exchange standard. Yet the “barbarous relic” – as John Meynard Keynes once famously called the gold standard and by extension gold itself – is once again attracting professional and retail investors. The ever growing open interest in gold futures – that routinely stands between $100 and $150 billion -, and the increasing volumes of “mum and dad” money invested in gold-backed ETFs – to the tune of $200 billion – are a testimony of new gold frenzy. In the 2Ks, the price of gold rose sevenfold before losing almost 40% of its value in dollar terms between 2012 and 2016 and hovering on a plateau before starting a new rally in 2018.

It should be recalled that interest for gold had similarly surged in the 1970s, following the demise of the post-war gold-exchange standar,,d starting with the Nixon shock in 1971. At that time, in a stark inflationary environment, fuelled by two major oil shocks in 1973-1974 and in 1979, the price of the yellow metal jumped more than twenty times between 1971 and 1980, from its long standing official level of $35 an ounce. From that period of stagflation, which was in a way reminiscent of the major German hyperinflation that followed World War I, gold inherited a reputation as a hedge against inflation … or rather hyper-inflation. Or was it actually perceived as a hedge against macroeconomic uncertainty? The answer is not that clear. Actually, gold performed poorly on a long term basis as a hedge against inflation. Adjusted for the prices of goods ans services, the value of gold fluctuated wildly over the last fifty years.


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