Why don't you need gold and silver

August 3, 2023

Gold, silver, and other precious metals have long been regarded as symbols of human wealth due to their inherent scarcity. Additionally, throughout human history and economic development, these precious metals have served as widely circulated currencies. Even in today's international markets, gold remains the fifth-largest international settlement currency after the US dollar, euro, pound sterling, and yen. Unlike fiat currencies backed by governments, precious metals possess a natural supply with relatively stable availability and are less susceptible to significant value fluctuations. Their international credit is robust, and trading settlements are secure, leading them to be considered as a form of "hard currency."

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With the development of the modern financial system, gold and silver not only maintain their characteristics as precious metals but also gain enhanced financial attributes. However, whether it's for inflation hedging or as safe-haven assets, most of the time people don't need gold and silver. As Warren Buffett once said, "Gold gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again, and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head." Charlie Munger also stated, "If you were a Jewish family in Vienna in 1939, gold was a good thing to sew in your garments, but I think civilized people don't buy gold, they invest in productive businesses." Gold and silver prices exhibit a strong correlation, with silver being considered a leading indicator of gold price movements. By observing the trends in gold and silver price movements (see Figure 1), it's noted that changes in silver prices usually precede those of gold and are characterized by greater volatility.

In the context of gradually peaking interest rates by major global central banks, the need for precious metals to act as a hedge against inflation diminishes. Once inflation is contained, the purchasing power of fiat currencies stabilizes, leading to a reduced demand for gold and silver. Precious metal prices tend to decrease as inflation stabilizes since their liquidity is lower compared to typical fiat currencies. They are also less suitable for direct investment in assets like stocks, bonds, and real estate. Even in commodity trading, the valuation of precious metals can be confusing. Referring to the historical trend of international spot gold prices (see Figure 2), by the end of October 2022, the US experienced a resurgence of high inflation, and the CPI index continued to rise, causing the international spot gold price to return to an upward trajectory. On February 2, 2023, the Federal Reserve initiated its 8th rate hike of this round, raising interest rates to 4.5%-4.75%, approaching the highest pre-financial crisis level. Consequently, the international spot gold price started to decline. On May 4, the Federal Reserve announced its 10th rate hike, raising interest rates to 5%-5.25%, surpassing 5% and the pre-subprime crisis level, causing the international spot gold price to slide again. With the measures of raising interest rates and inflation improving, by the time the US June CPI index was announced on July 12, showing a year-on-year increase of 3% and core CPI increasing by 4.8%, both below market expectations and gradually approaching the Federal Reserve's 2% inflation target, the most recent rate hike on July 27 to 5.25%-5.5% continued the downward trend of the international spot gold price.

As global macroeconomic disturbances ease, the need for precious metals as safe-haven assets diminishes. When global macroeconomic disturbances such as wars and economic crises gradually subside, people's risk preferences return to other financial assets, leading to a decline in the prices of precious metals. Because precious metals lack inherent growth potential, unless specific industrial or financial innovations cause a rapid increase in demand for a certain precious metal and the exchange rate of precious metals against currencies stabilizes after high inflation subsides, speculative interest in precious metals will wane. Since the outbreak of the Russo-Ukrainian War on February 24, 2022, the international spot gold price rapidly rose to a historical high of $2069 per ounce on March 8. Subsequently, as the Russo-Ukrainian conflict reached a long-term stalemate, international safe-haven funds gradually moved away from gold. Along with the global economic recession and pressure on asset prices, the international spot gold price experienced phased declines. On March 9, 2023, the collapse of Silicon Valley Bank led to a panic in the banking system, and market sentiment turned unfavorable towards the US dollar, causing a sharp increase in the international spot gold price. After expectations of a banking crisis eased by late March, the international spot gold price remained in a fifty-day congestion area. On July 7, when the US Bureau of Labor Statistics released data showing that non-farm payroll employment in June was far below expectations, the US dollar weakened, driving the international spot gold price higher.

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Howard Marks, co-chairman of Oaktree Capital, pointed out, "Gold is impossible to value and it is like religion: you’re either a believer or you’re not, and one can’t ever convince the other." We believe that the speculative value of gold and silver far exceeds their intrinsic value. Gold and silver are not the valuable assets that investors truly need.

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