Dan Atkinson in London
Warren Buffet – a chap who ought to know – once described the stock market as being merely a reference point, allowing investors to check whether anyone was offering to do anything foolish.
Much the same could be said of the gold price which, most of the time, indicates whether, in their management of national currencies and bonds, governments are behaving in a manner that is routinely foolish or completely insane.
Should the former be the case, bullion prices will mostly bump along the bottom, and there will be the occasional article “explaining” that the yellow metal’s investment days are over. Should the latter be true, the price will explode, and there will be the occasional article “explaining” that no smart investor ever held less than 10% – make that 20% – of his portfolio in gold.
But there is a complicating factor, which is that governments themselves are among the biggest players in the bullion market. In other words, their central banks are major holders of gold in their own right, and governments set the rules under which gold is held and traded.
This latter role is probably the most important. After all, the existence of Fort Knox was probably of less significance to the would-be bullion investor during the mid- century period of United States history than the fact that American citizens were prohibited by law from holding gold.
Similarly, the Bank of England’s own stash has mattered less to bullion buyers in Britain during the past 15 years than the fact that value-added tax (VAT) was imposed on investment gold in 1982 and has suppressed the market ever since.
But – happy day! – British Chancellor Gordon Brown is to lift this impost from January. Those with long memories will recall what happened in the early Seventies when the USlifted its own restrictions on bullion ownership. The price exploded, from about $44 an ounce in 1973 to $1 000 an ounce in January 1980. There are even parallels: a generation of politicians and central bankers decided 30 years ago there was little to fear from the toothless old golden tiger and that only the superstitious and simple would wish to hold it.
Now, a new generation believes its own paper money is so sound that gold poses no real alternative.
So, ought the historically minded investor pile in? Maybe. But bear in mind that today’s finance ministers may be right. And, if they are, then a gold investment is going to look pretty sick. Gold produces no stream of income, unlike a share certificate or a bank deposit. On top of that, it has to be insured and secured, generating overhead costs for its owner.
If Brown and all his colleagues who agreed to the European Union directive freeing gold investment from VAT are correct, then the smart thing to do is to keep faith with income- generating paper securities and restrict any interest in gold rings, necklaces and dental fillings.
If they’re wrong, of course, then the bullion buyer will be feeling pretty smug a year or two into the next century. But, for them to be wrong, then a crisis on the scale of the 1973 oil price shock will be called for to stabilise the world economic system. In a sense, the gold buyer is actually pitting his own wits against those of Brown and his advisers.
Buying the gold itself is the least of the investor’s worries. The key concern is that of buying gold and seeing the price continue to languish below $300 an ounce, as it does now.
Peace of mind comes from remembering bullion is a store of value over time and nothing else. An ounce of gold buys about the same number of loaves of bread now as it did during the reign of Nebuchadnezzar. The same. But no more.