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As the market hedges against inflation and commodity prices gallop, the king of metals appears to be ruled out. Exactly 50 years after the end of Bretton-Woods: what goes wrong for gold?
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My grandma couldn’t have imagined it herself. Justine Vermorgen – née Van Velthoven – from the Biezenstraat in Hamme was a fashionista and investor guru avant la lettre. A posthumous status that she owes to her trademark: her twinkling smile. Her gold teeth shone harder in the 1980s than the cast iron of the Mira Bridge or the freshly printed book covers of a debuting local writer, a polite long-haired boy named Herman.
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In Ham’s working-class neighborhoods, gold teeth were considered an excellent investment. And that turned out to be a correct guess. The price of gold has risen exponentially in recent decades, to the extent that many owners of gold crowns and fillings robbed their own mouths to exchange them for cash when all-white dentures came back into fashion.
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Golden Teeth made another niche comeback among rappers and hip-hop artists in the 2000s. According to the fashion magazine Elle, they have fallen off their pedestal since 2010 due to the ever higher production costs. Or, as my grandmother would have said, ‘put on top of your hands’.
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Fort Knox
Buying gold as a protection of prosperity, in whatever form, has a long tradition. This Sunday we commemorate the most important milestone in post-war gold history. On August 15, 1971, also a Sunday, the average American was shocked when the Ponderosa ranch suddenly jumped into a picture of the White House on his TV screen. President Richard Nixon interrupted the popular TV show ‘Bonanza’ to make an announcement that would determine the future fate of the gold price: he decoupled the dollar from the gold standard.
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Nixon’s speech announcing the abolition of Bretton-Woods.
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Until then, foreign central banks could exchange their dollars for gold at the fixed price of $35 an ounce, a bit like buying a Tesla Y for around $1,000. The Bretton-Woods mechanism automatically imposed strict monetary orthodoxy on the Federal Reserve. Excessive dollar printing could trigger a potential raid on Fort Knox, where America’s treasured gold reserves were stored.
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Researchers found that only measured over very long periods of time – a century or more – gold did a good job of maintaining its purchasing power.
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Nixon’s decision was the start of an inflation spike, peaking at 14 percent by 1980. But even more than the longevity, the gold price freed from the dollar chain climbed. Today it is 50 times higher than at the time of Nixon’s intervention. This apparent correlation between gold and inflation has led many to believe that gold is the perfect defense against currency depreciation.
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My grandmother is turning over in her grave, but I’m not so convinced. Is gold really the sacred inflation hedge we always mistake it for? I remember the words of Luc Aben of the private bank Van Lanschot when our money exchange Finance Avenue was still in the flesh. ‘I am not a fan of gold as an investment,’ Aben told colleague Wouter Vervenne in the main economist debate. ‘Simply because I’ve never seen a dollar of cash flow out of a gold bar before.’
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Goudkevers
The gold beetles in the room shuddered audibly, but I remember that I thought it was an astute observation. ‘And no interest or dividend either,’ I thought.
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When you compare the performance of gold against stocks, it doesn’t look so shiny either. The S&P 500 has posted an annualized return of 11.2% since that August Sunday in 1971, assuming dividends were gradually reinvested. That compares to 8.2 percent year-on-year for gold.
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The fact that gold is still somewhat close is due to the strong rise in the years after the end of Bretton-Woods. Excluding the 1970s, you get a return of just 3.5 percent per year for gold, versus 12.2 percent for the S&P.
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Flashcrash
The Wall Street Journal recently reported on a study by Duke University professor Campbell Harvey and Claude Erb, a former commodity portfolio manager at TCW Group. In their view, gold is only good inflation protection for a time frame that is much longer than our investment horizon. They found that only measured over very long periods of time – a century or more – gold did a good job of maintaining its purchasing power. Over shorter periods, the price fluctuates no more or less than any other asset.
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Spandau Ballet – Gold (1983)
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Last week it became clear that gold is not as indestructible as Spandau Ballet told us in 1983. Gold experienced a flash crash on Monday and had to turn in 4 percent or $60 in minutes. The precious metal went through a technical support level, after which a variety of stop-loss orders went into effect. Combined with the thin trading, that caused the flash crash.
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Clearly the IMF’s fault, captioned a startled reader. For the first time since 2009, the International Currency Fund issued Special Drawing Rights (STRs) for a record $650 billion. That triggered panic selling, he said. Although you could just as well argue that the creation of currency reserves is inflationary and should cause the gold price to rise.
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Gold is out. Young investors don’t want inert bars, they want growth and cash flows.
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Anyway, for gold, Monday’s flash crash was the culmination of a rough year. While lesser gods – from palladium to copper to even lumber – climb double the percentages, gold, with an annual loss of 8 percent, is more gloomy than Lionel Messi in his retirement from FC Barcelona.
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Well, a pause is normal, say the believers. Gold is still very high, close to a record high. My wild card? The Zeitgeist. Gold is out. Young investors don’t want inert bars, they want growth and cash flows. They don’t care about debt, they’ve never known otherwise, and against inflation they have their own digital patron saint. Because who took the gold medal this week? Right, yes. Bitcoin is experiencing a real summer of love with a 50 percent gain since mid-July. Toto, I have a feeling we’re not in Hamme anymore.
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Gold from Brussels sewers
Researchers from the VUB and the ULB have succeeded in extracting gold, platinum, silver and other metals from the sludge that remains after the purification of the Brussels sewage water. The Sublimus project aims to give a second life to nanoparticles of (precious) metals that end up in sewage water, for example through the erosion of jewelery when you wash your hands or as a component of certain medicines and chemical products. The aim is to purify 10 kilos of gold from the sludge in a year. At the current gold price, that is good for a value of 475,000 euros.
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