Gold through the ages: its economic and historical significance

Tracing gold's impact: from ancient empires to modern economies

If you were to chart the price of gold across a timeline spanning hundreds or even thousands of years, you would be able to identify many key events in world history. For instance, around 550 BC, Croesus minted the first gold coins, earning a reputation immortalized by the phrase "as rich as Croesus." The conquests of Caesar in Gaul at the dawn of our era, along with the massive looting of gold, drastically reduced its value in Rome. From 250 AD, a decline in the purity of Roman coins accelerated the empire's fall, marking one of history's earliest recorded instances of inflation. In the early 16th century, the influx of gold from South America made Spain extraordinarily wealthy. This wealth enabled extravagant spending and reduced the need to produce goods domestically. However, when the gold supply ceased, the country ultimately plunged into poverty. The Latin Monetary Union, established between 1865 and World War I, was the first of its kind, allowing Belgium, France, Italy, Switzerland, and later Greece, Romania, and Spain to mint gold and silver coins of uniform size, weight, and purity. Looking at gold's history, you'll find dazzling stories. In 1940, when the Germans advanced, Belgium decided to hand over one-third of its gold reserves to France for safekeeping and transport to the US. The other two-thirds had already been secured in the UK, the US, and Canada. However, the French sent the gold to Dakar instead and later handed it over to Germany to liberate prisoners of war. This gold eventually found its way to Berlin and was stored in a German salt mine near the town of Merkers, where it was later recovered. Gold indeed has a rich history.

Gold's unique role and resilience in the investment landscape

Gold is less utilized in industrial applications, is scarce, and remarkably enduring. According to the World Gold Council, around 212,000 tons of gold have been mined so far, with approximately 3,500 tons mined annually in recent years. Like other precious metals, gold maintains its properties almost indefinitely. In contrast, metals such as silver, palladium, platinum, and rhodium are more integrated into industrial uses, making them more sensitive to economic fluctuations. For instance, palladium and platinum are essential components in automobile catalytic converters. Due to its relative independence from the economic cycle, gold represents a compelling and valuable option for portfolio diversification. Nonetheless, opinions on its value as an investment vary. Prominent investors such as Warren Buffett have criticized gold's non-productive nature, famously remarking, "It produces nothing. If you have an ounce today, you'll still have an ounce in a year."

Gold's resilience in the face of economic shifts and central bank strategies

Gold has been appreciating for several years, initially fueled by a decline in real interest rates. The ‘real’ interest rate is the inflation-adjusted interest rate, which became increasingly negative as nominal rates declined while inflation rose. Typically, holding gold entails an opportunity cost in the form of foregone interest. However, in an environment where real interest rates are negative, gold becomes an attractive option for safeguarding purchasing power. Such negative rates often occur alongside rising inflation, prompting investors to turn to tangible assets like gold to preserve value.

Many analysts anticipated a correction in gold prices with the recent rise in interest rates and a drop in inflation, which led to a significant uptick in real interest rates. Contrary to these expectations, gold prices did not adjust downward but instead soared to new heights. Observations of gold ETFs—exchange-traded funds that invest in physical gold—reveal a reduction in the amount of gold they hold, indicating that they have been net sellers of gold. At the same time, central banks have been bolstering their gold reserves, adding over 1000 tons in 2022 and 2023 combined. The first quarter of 2024 even marked the strongest quarter on record for central bank gold purchases, underscoring a growing institutional trust in gold as a reserve asset.

Global demand for gold amid economic uncertainty and geopolitical tensions

Physical demand for gold from private investors in China, India, and Turkey has been notably robust. In China, this surge is attributed to investors looking for alternatives amid a struggling stock market and real estate challenges. In Turkey, the motivation is the rampant inflation that has eroded the purchasing power of traditional savings. Even in the United States, Costco, one of the largest supermarket chains, began selling physical gold in October, which sold out immediately, indicating strong consumer interest.

However, these trends cannot be isolated from the geopolitical landscape, particularly the war in Ukraine. This war initially caused a brief spike in gold prices at the beginning of 2022, but its implications have since deepened. In the West, there is ongoing debate about the possibility of using the $300 billion in Russian assets, of which two-thirds is estimated to be held at the clearinghouse Euroclear in Belgium, to fund Ukraine's reconstruction. Through the eyes of non-Western powers, these discussions undermine confidence in the global financial system. As a result, they increasingly prefer holding gold in their own vaults over maintaining funds in a financial system controlled by the West. This shift mirrors actions taken by Western nations themselves in recent years; for instance, the Netherlands and Germany have previously repatriated their gold from the US.

Econopolis on gold: balancing strategic and tactical asset allocations in turbulent times

In essence, gold remains a pivotal asset today. At Econopolis, we analyze its role through a portfolio management lens, distinguishing between strategic asset allocation, which addresses long-term goals, and tactical asset allocation, which focuses on short-term opportunities. Historically, our strategic allocation to gold has been between 3% and 5%.  However, in recent years, we have tended to allocate more to gold for tactical reasons. With the recent rise in real interest rates presenting new challenges, we have scaled back this overweight position. We continue to maintain a significant allocation to gold, recognizing its enduring value amidst escalating geopolitical tensions and its status as the 'ultimate safe haven'.