Gold is not the endgame...

Since Bretton Woods agreement in 1971 when the US discontinued the Gold standard, the demand for gold for storage of value, vanity, social & financial security, and religiously important objects has diminished. In my view, there is no reason to believe that this trend will reverse in the foreseeable future.

Gold phasing out of cultures

Most ancient cultures, China, Egypt, Mesopotamia, Indus Valley etc. have believed in the continuation of life after death. Gold being an indestructible (and therefore sacred) object had always been an important part of their religion, culture, traditions and beliefs.

However, the factors like popularity and spread of technology in common man’s life; rising fascist and communist tendencies due to worsening socio-economic disparities; rise in electronic transactions (personal, social and commercial) thus lower risk (less travel, less physical transactions & deliveries); emergence of new articles of luxury to serve the vanity needs of the affluent; stronger and deeper social security programs; demise of monarchy; spread of spiritualism etc., have resulted in diminution of traditional demand and pre-eminence of gold.

In the modern context, technologically challenging things, e.g., Crypto Currencies, NFTs etc have more potential to attract peoples’ fancy as compared to gold. In the past 18 months, we have seen this trend picked up substantially with Crypto gaining traction while Gold giving flat returns.

Gold relevance?today...

The demand for gold as a store of value is a deeply complex matter. In the past gold had been a preferred asset to store value both during economic as well as political (including geo-political) crises.?Gold has served as reserve currency whenever the paper currencies have lost the faith of people due to a variety of reasons, particularly high inflation and/or fiscal profligacy. It has also been used as such during transition periods in global strategic power equilibrium.

In the past five decades post Bretton Wood, there have been two instances of global financial crisis:

(a)?In the 1970s the world faced serious stagflation as the demand generated by post WWII reconstruction activities faded and Iranian revolution created a worldwide energy crisis. Gold jumped 10x in real terms during the decade of 1970-1980), to give back most of the gains in the following two decades.

(b)??Again in the decade of 2000s, as the dotcom bubble hit the global economy, interest rates crashed leading to a sub-prime crisis that culminated in a major global financial crisis. Gold jumped 5x in real terms during this decade (2001-2011).?Most of these gains have again been evaporated.

Given the negative rates in large economies like EU & Japan and near zero in US; persistent deflationary pressures despite unprecedented and obscene amounts of money printed by Central Bankers; poor economic growth outlook; and war like situation in global currency markets – the gold keeps reemerging as a favorite asset to store value.

But?Gold is not the endgame...

The socio-economic disparities are rising in the developed world at a pace unprecedented in economic history. The situation is likely to materially worsen in coming years. Inarguably, the so-called unconventional monetary policies followed by the central bankers own the primary responsibility for this phenomenon. With an overwhelming US$30trillion worth of bonds, many of which are 10-30year maturity, are yielding negative returns at this point in time. Poor savers and pensioners who mainly rely on their savings for their livelihood are stressed like never before.

Large economies like Japan and the EU have mostly failed in their vigorous efforts raising inflationary expectations in their respective economies. There is therefore little incentive to invest in these economies. The employment opportunities are therefore not likely to rise in any sustainable manner. We have already seen the unsustainability of one decade of job gains in the US. All jobs created in 2009-2019 have evaporated in just?a few months?of lockdown?and the cycle to regain them has again begun.

In such an economic scenario, Gold will be used as a last resort to survive, not used as an investment.

The fallacy of investment advice...

There is no dearth of experts who have written about the endgame of the current monetary policy practices. Most of them suffer from historical hindsight and extrapolation of current trends.?

I believe the endgame will mark a watershed in global economic history - many?monetary?systems will become redundant; many currencies will cease to exist; and monstrous debts will be written off the books. It is difficult to fathom that this task can be achieved under the current?monetary system.

A large number of analysts have forecasted that gold will be a preferred currency of the world amidst all this chaos. I?strongly?disagree.?

In my view, presently the interest in gold appears to be more intuitive rather than analytical. It is being presumed that the end game of the non-conventional monetary policies currently in practice will be prolonged?stagflation, complete disintegration?or?restructuring of the present monetary systems where USD may longer be the sole reserve currency and near complete erosion of savers’ financial wealth.

Most of the current analysis?like this?suffers?from some degree of cognitive dissonance. It is trying to dress a trading opportunity into a secular trend.?

I do not see any reason why gold should ever touch its 1980 high in real terms and why not go below its 1971 lows (in real terms).?On the other hand, newer technologies like Blockchain, Metaverse, Artificial intelligence related asset classes may continue to gain traction over the next decade.