Pet rock, barbarous relic or real money?

Your choice…you know mine

My good friend Tim price wrote a timely piece on gold a few weeks back, here’s the link, that started with the following quote from a FT reader responding to Citigroup economist Willem Buiter’s description of gold as “a 6,000 year-old bubble”.

“When a social construct (gold as money) survives for 6,000 years I would expect curious people to inquire as to whether it is tied to some immutable underlying law, or otherwise investigate if there is something more here than meets the eye. Not so curiously inclined, our court economists prefer to write this off as a 6,000 year old delusion. That says a lot about the sorry state of the economics discipline today.”

As you will also know I’m not a devotee of classical or should I say “mechanical” economists, who insist that the laws of economics can be codified and modelled to provide “if this, then that” answers to the conundrums they find themselves facing, mainly as a result of their own models. I have been reading the Market Mind Hypothesis by Patrick Schotanus, link here, who applies “cognitive” economics as an antidote to the “mechanical” approach. One more useful link is to this lecture by Dr Iain McGilchrist at the Darwin University Cambridge which really hits the nail in terms of our thinking that can so easily be applied to how we see market behaviour. It is priceless please view here.

The current economic conundrum, apart from all the others, is that gold is making new all time highs as real interest rates are rising. Applying “if this, then that” the gold price should be falling not rising. The common narrative suggests that one of these metrics is wrong and that it’s the gold price. We would argue that it’s the other. The inflation debate is not settled, it never is, but will rise inexorably if the central banks and their cohorts of mechanistic economists start loosening monetary policy one way or another. They won’t call it QE, but this flood of liquidity will push markets and inflation higher along with gold, as by then, it will be obvious that real rates are actually falling.

That is what gold is signalling right now. Some central banks have been accumulating gold (NB not the Fed nor the BoE where the sale of half our gold reserves by Gordon Brown in 1999 when gold was $282 an ounce, is still lamented.) China and Russia are the main acquirers along with many other BRICS economies, who are becoming increasingly reluctant to settle their commodity commitments in dollars, preferring local currency payments, with any trade balances settled in gold. Yes, yes the dollar is still the world’s reserve currency, but the writing is on the wall for those care to read it.

The start of my journey into the barbarous relic was through meeting Julian Baring back in the late 70’s. For many years, first at the stockbrokers James Capel and later as manager of gold funds for Mercury Asset Management, Julian was the City's most articulate and enthusiastic proponent of gold and gold-mining shares. Back in the day institutions had on average a 10% exposure to miners in their equity portfolios. Today? Not so much, if any…

Amongst his other attributes, apart from being a vineyard owner in France, he was a consummate trencherman. Lunch with Julian required considerable stamina! He managed to link everything back to gold and his raison d’etre was the observation that a gold sovereign has always kept pace with the price of lunch at the Savoy. At the current sovereign price, £450 may seem an excessive amount to pay for lunch, but then you have probably neither lunched with Julian nor surveyed the wine list at the Savoy! And, as gold hits an all time high, I shall raise a glass in his memory.

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