Big establishment players talking up gold

Written by: Christiaan van Huyssteen

Gold has been money, officially and unofficially, in many regions for most of human history. I use the term ‘officially’ to describe periods when gold has an official relationship with a national currency. No major country has had a link between its currency and gold (or any other hard asset) since 1971. All major currencies still have an unofficial link to gold in the sense that most central banks still hold considerable amounts of gold in their vaults.

In recent times, gold has come to be seen as a safe haven for the fearful. It has become fashionable for central bankers and the intelligentsia to scoff at gold. After all, who has time for such a barbarous relic when you have the best and brightest at the helms of public finance masterfully deciding how much money should be issued, and what interest rates should be? Unfortunately, despite their high IQs and their complex computer models, central planners have shown over and over again that they are inept in understanding incredibly complex modern economies, which consist of millions of economic agents pursuing their own separate interests.

This is why it has become so interesting to see some major, deep establishment economists, central bankers and big time investors come out with favourable words about gold as a store of value.

Kenneth Rogoff

Rogoff is a Yale and MIT graduate, who is currently a professor of economics at Harvard. He has served as an economist at the IMF and Federal Reserve.

Here is what he had to say in a recent op-ed:

“Are emerging-market central banks overweight in dollars and underweight in gold? Given a slowing global economy, in which emerging markets are probably very grateful for any reserves they retain, this might seem an ill-timed question. But there is a good case to be made that a shift in emerging markets toward accumulating gold would help the international financial system function more smoothly and benefit everyone.

…

There has never been a compelling reason for emerging markets to buy into the rich-country case for completely demonetizing gold. And there isn’t one now.”

Rogoff also said that developing countries should shift 10% of their reserves into gold, in order to diversify away from their dollar-based reserves.

Stan Druckenmiller

Druckenmiller is the legendary hedge fund investor, who managed average annual returns of 30% from 1986 through 2010.

Below is an excerpt from a recent presentation he gave at the Sohn conference:

On a final note, what was the one asset you did not want to own when I started Duquesne in 1981? Hint…it has traded for 5000 years and for the first time has a positive carry in many parts of the globe as bankers are now experimenting with the absurd notion of negative interest rates. Some regard it as a metal, we regard it as a currency and it remains our largest currency allocation.

Gold is not an investment, since it has no risk, and therefore no yield. Gold is not a commodity either, since it has barely any industrial uses. Gold is money.

Jeff Gundlach

Gundlach is a prominent American bond investor and fund manager. He is known as the ‘king of bonds’.

From a recent webcast with other investors:

"I remain bullish on gold; I own gold miners."

George Soros

Soros is the multi-billionaire founder of the Quantum hedge fund, and is now managing the his family’s funds. He is a very influential individual: he is an attendee of annual Bilderberg meeting, and is a member of the Council on Foreign Relations.

From Zerohedge:

George Soros is again buying gold and selling and going short stocks due to BREXIT and EU “collapse” risk, after a six year hiatus from the gold market.

The multi-billionaire hedge fund manager, the man who “broke the Bank of England” and one of the richest and most powerful men in the world has now publicly warned that inflation is likely soon and is voicing concerns about BREXIT, the disintegration of the EU, a Chinese financial crash, global contagion and a new World War.

From Bloomberg:

Billionaire George Soros prepared last quarter for gloomy times, dialing back his U.S. stock investments by more than a third, betting against the equities while banking on gold.

Soros also bought bullish options contracts on 1.05 million shares in the SPDR Gold Trust, which tracks the price of bullion. What’s more, the fund took a stake in the world’s biggest producer of the metal, Barrick Gold Corp., worth $264 million at the end of March, the filing showed. Soros acquired 1.7 percent of Barrick, making it the fund’s biggest U.S.-listed holding.

Claudio Borio

Borio is head of the Monetary and Economic Department at the Bank of International Settlments (often described as the central banks’ central bank). Although he didn’t use the word ‘gold’ in a recent speech, he did say that the global monetary system lacks an ‘anchor’.

Here’s an excerpt from his speech at the Seventh high-level SNB-IMF conference on the international monetary system in Zurich:

There are two related concerns with the dominance of one currency in the IMFS. One is that the “asymmetries” involved may exacerbate the tension between the interests of the dominant country, on the one hand, and those of the system as a whole, on the other. That is, the country “projects” its influence on the rest of the world, which cannot “insulate” itself. The other is that, more specifically, the IMFS may not have an effective anchor for monetary and financial stability.

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First, it is not clear to me that more pluralism is the answer to the main problem. True, it may impose greater discipline on the dominant country. Greater choice must surely help.15 But more pluralism, per se, does not address the root problem, ie the absence of a global anchor. Could there not be a race to the bottom rather than to the top? And even if the SDR was placed at the system’s centre, what would anchor the SDR?

The SDR (Special Drawing Rights) is effectively a world currency, issued by the International Monetary Fund. It consists of (but is not backed by) a basket of major international currencies.

Conclusion

It is interesting to see how prominent investors, and establishment economists see both the need to invest in gold as a safe haven, and its potential role as an ‘anchor’ for the international monetary system. In author and economist Jim Rickards’ new book, ‘The New Case for Gold’, he talks about a scenario where during the next global monetary crisis (they happen more often than you think: 3 times in the last century), the IMF and other major national players (the major central banks) will come together and set out the new ‘rules of the game’. Depending on how badly confidence in the system has been eroded, the major powers may favour giving gold an official role to play in any future iteration of the global monetary system. Gold may, for example, be included in the basket of currencies that makes up the SDR. Major central banks may agree to go back onto a partial gold standard.

Gold has played a role in finance and trade for 5 000 years. It is foolish and short-sighted for the modern day intelligentsia (paper-bugs?) to make fun of those who hold onto it and see value in it. If we get to a point where markets lose trust in paper currencies, gold will be the first port of call.

Christiaan van Huyssteen is a co-founder of the Rational Standard.