As good as gold?

The team at Pyrford consider gold versus fiat money.
July 2019

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Risk disclaimer

Views and opinions have been arrived at by BMO Global Asset Management and should not be considered to be a recommendation or solicitation to buy or sell any companies that may be mentioned.

The information, opinions, estimates or forecasts contained in this document were obtained from sources reasonably believed to be reliable and are subject to change at any time.
You may have noticed the price of gold creeping up. It is now at its highest level since 2013 (in US dollars). Gold does well in uncertain times and these times clearly qualify. We’ve always liked the fact that gold has been a constant throughout all of human history. It has been a store of value for thousands of years whilst alternatives have fallen away. Since 1800, and expressed in US dollars, gold has provided an average compound annualised real return of around 0.6% (source: The Golden Constant by Roy W. Jastram with updated data by Pyrford International). Anything that maintains its real purchasing power for more than 200 years gets a tick from us. Anecdotal evidence suggests it has probably maintained its real purchasing power since the era of the pyramids.
Modern paper currencies – fiat money – are a tiny blip in gold’s history. A recent web posting by made the following comment:

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The value of investments and any income derived from them can go down as well as up as a result of market or currency movements and investors may not get back the original amount invested.
Views and opinions have been arrived at by BMO Global Asset Management and should not be considered to be a recommendation or solicitation to buy or sell any companies that may be mentioned.
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“According to a study of 775 fiat currencies…there is no historical precedence for a fiat currency that has succeeded in holding its value. Twenty percent failed through hyperinflation, 21% were destroyed by war, 12% destroyed by independence, 24% were monetarily reformed, and 23% are still in circulation approaching one of the other outcomes…the average life expectancy for a fiat currency is 27 years.”

It is interesting that several central banks have been adding to their gold reserves in recent years – but none so prominent as the Russian central bank.
Chart showing Russian gold reserved

Use our handy glossary to look up any technical jargon.

Use our handy glossary to look up any technical jargon.

It would appear that Russia is diversifying its reserves away from US dollars. On the other side of the ledger we see regular selling of US treasuries. China is also steadily adding to gold reserves although the actual amount is difficult to ascertain. It is believed that the official position (see below) understates the actual gold-holding status.
Table of the world's official gold reserves
According to the World Gold Council purchases by central banks in the first quarter of this year were the strongest since 2013. Turkey has been a constant in terms of central bank buying whilst other purchasers include Qatar, Columbia, India and Kazakhstan.
Exploration success has been lacking amongst gold mining companies in recent years and according to a recent study by McKinsey and Co stated reserves have fallen by around 26% since 2012. Exploration spending is down around 70%. The World Gold Council tells us that annual mine production is currently around 3500 tonnes, insufficient to meet annual demand for jewellery, investors, central banks and technology. The supply gap is made up by recycled gold.
Gold cannot be manufactured by central banks and, perhaps most importantly, gold is money. It always has been, and we’re not about to deride those who choose it over alternative investments. Besides, it looks far more attractive around the neck than a string of paper currency.

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