Gold isn’t a traditional investment good: it is an alternative to paper money. From that perspective, its allure is all too clear. The purchasing power of gold is as good now as it was in 1900. The pound lost 99 per cent of its value over the same period. As a store of value, gold wins hands down because its supply is inelastic: you can’t create more of it every time you need to bail out a bust financial sector or bankroll a profligate government. Of course, I don’t know whether the gold price will be higher next week, next month, or even next year. But I do know that the things which have driven gold’s surge – uncertainty, money-printing, and fiscal incontinence – are here to stay. Monetary debasement is the whole point of a fiat currency. Make of that what you will.
Tom Clougherty is executive director of the Adam Smith Institute.
In recent weeks, I have sold out of physical gold in favour of more diversified commodity exposure. There are a number of reasons for this. Gold tends to do best in absolute terms when the US dollar is weak and global growth is slowing. The US-led global upswing could mean that neither condition holds true this year. The dollar has been strong in recent months as the likelihood of additional quantitative easing by the Federal Reserve has fallen. Gold is also becoming less attractive within the commodity asset class. A pick up in global growth tends to favour industrial metals like copper, while oil offers a much better hedge against geopolitical shocks. Retail holdings of gold have become enormous and survey readings remain bullish. However, this suggests a significant downside risk if sentiment takes a turn for the worse.
Trevor Greetham is a portfolio manager at Fidelity's Multi Asset Funds.
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