Market Commentary
Gold – A Demand Story
The reasons for owning gold have remained constant throughout history.
Hedge against monetary debasement, preserving real purchasing power.
Geopolitical uncertainty, ultimately manifested in kinetic war.
Ideological anti-government bias (modern-day gold bug nutter types).
Cultural preferences, particularly among Chinese and Indians.
Secrecy/money laundering.
Hedge against central bank or central government policy incompetence.
The common thread of the above is some form of safety. Gold is a moderately mobile (it is heavy, but not too heavy relative to its value) hard asset that cannot be physically destroyed.
Gold’s stable properties, including money ones, gave it a highly sought-after financial profile: it was uncorrelated to most financial assets.
The advent of central bank credibility in the post-Volker years had the effect of raising public trust in American institutions. In addition to inflation credibility,
Bank failures were no longer acceptable public policy.
Debentures (bills, notes, and bonds) issued by the U.S. Treasury became known as the risk-free rate,with collateral hypothecation (and reverse hypothecation) properties that were fungible across world markets.
The modern credit-based money system required an elastic form of money that was responsive to private market and public policy objectives. Gold’s inelasticity made it a policy straight jacket and a private market nuisance and growth inhibitor.
The above innovations made the “barbarous relic”, to quote Lord Keynes, even more barbarous and this came at the expense of gold.
While exchange traded gold futures were introduced at the Winnipeg Commodity Exchange in 1973, and then in the U.S. in 1974, the nature of futures (contract roll, delivery and settlement, etc.) made them impractical for mass adoption. Retail investors were relegated to holding gold coins – another barbarous relic.
The introduction of the GLD ETF (exchange traded fund) in 2004 was a game changer for gold. The ETF solved the issues associated with futures contracts, as well as with physical custodial storage (warehousing and insurance). Suddenly gold became more liquified and fungible.
A gold ETF could be settled via DTC (Depository Trust Corporation) like a stock or posted as collateral in a traditional brokerage account. Options could be written on it to speculate or manage risk.
Gold was now a 21st century financial instrument, with commensurate demand for the yellow metal.
Below is a graph of the price of gold spot prices - the actual metal, not a roll-adjusted futures contract - that goes back to 1975.
The chart is in logarithmic format, as linear time series that cover large lookback windows are distorted and misrepresent data.