In Gold We Trust v2.0

In 2013, these notes examined the value drivers of gold. At that time, the metal was trading at c.$1,200 per ounce, having experienced significant appreciation following the Great Financial Crisis.

It started with a reference to Warren Buffett’s tirade against gold in his 2011 letter to shareholders. In it, he presented the yellow metal as an ‘asset which never produces anything’ and thus as an investment which is only made with the ‘hope that someone else, who also knows that the assets will be forever unproductive, will pay more for them in the future.’

Gold trades at $3,900 today (given the USD appreciation, an ounce of gold is worth more than $5,000 in 2013 USD terms). Gold has thus produced one thing: significant wealth.

Mr. Buffett appears to have underestimated a few key characteristics of gold.

Unlike securities, gold does not represent a claim against any counterparty and thus carries no default risk. Additionally, gold benefits from an inelastic supply, as the existing stock of gold dwarfs new mining additions to it. Finally, demand for jewelry and industrial production accounts for approximately half of the total demand for gold.

These three features distinguish gold from fiat currencies, which represent a claim against central banks, can be ‘printed’ at will, and have no physical use.

As a side note, cryptocurrencies (‘cryptos’) are often referred to as ‘digital gold’, highlighting their similarities: a store of value that is not controlled by central banks and which, in some cases, benefits from a fixed supply. Unlike gold, however, cryptos lack physical properties, and they also lack a history to serve as a hedge against uncertainty. In fact, there is near-zero correlation between gold and cryptos.

Gold’s value is shaped by two forces: market parameters and investor preferences.

From a financial market standpoint, gold prices have logically proven to be inversely correlated with real interest rates. Since gold has no yield, the opportunity cost of holding it declines as real interest rates go down (due to rising inflation expectations or falling nominal interest rates). The rise in gold prices following the post-GFC decline in real rates and their COVID-driven collapse illustrates that relationship.

However, if financial factors were the only driver, it would be challenging to explain gold’s current price levels: real US interest rates are now back to pre-GFC levels, when the gold price was below $1,000.

The shift in investor preferences has markedly favored gold in recent years. Repeated shocks (GFC, euro crisis, pandemic, wars, tariffs), the decreasing trust in ‘risk-free’ government securities due to unsustainable fiscal policies, and the breakdown of the negative correlation between stocks and bonds since 2022, have increased investors’ appetite for diversification and hedges. Thanks to its unique characteristics, gold has historically played an effective role in this regard, at least in the short term.

Central banks’ preferences have followed a similar evolution. Since 2022, they have materially increased their purchases of gold, considered a ‘neutral asset’, to hedge against geopolitical fragmentation.

More generally, gold’s status as a ‘tariff-resistant’ currency will drive its attractiveness for all investors, including central banks, as long as national policies promote global trade decoupling.

Gold, therefore, occupies a distinct position within the global belief system. What it produces or does not produce is irrelevant; what it provides is essential: a reliable hedge against anti-institutionalism and, arguably, against humans’ apocalyptic tendencies.