Gold trades currently at around $1570 per oz. In a new Fowler Drew Position Paper, Gold: inflation hedge, catastrophe insurance or pure speculation?, we suggest plausible arguments the price should be as low as $300 (compensating for all past inflation since the wartime Bretton Woods fixed-exchange rate regime) or as high as $750 (assuming since the end of dollar convertibility in 1971 gold reflects expectations of future inflation). This degree of doubt about valuing gold is a major reason for our rejecting it as a suitable asset for inclusion in a diversifed long-term portfolio.
Even as an ‘option’, bought with a small part of our wealth, with the expectation of loss but fear that widespread government defaults will seriously damage all other assets, the cost of what can only ever be partial insurance appears irrationally high. Compared with most of the post-war period, which has been unusual precisely because a positive trend of general price rises became a systematic feature, the need for gold holdings has weakened since governments have issued a wide range of inflation-linked bonds. It focuses the mind on the one attribute of future chaos that contemporary investors need protection from: governments reneging on inflation indexation.
We do not think that price-insensitive insurance activity can really explain the high price of gold. The same real price level when achieved in 1980 was driven by trend-following speculation and the two-decade retracement of 80% in real terms also makes most sense if explained in terms of trading strategies. This is not something we want to be involved in.
Our own clients have not shown much interest in gold, which is a little surprising as they are mostly questioning if not downright sceptical people who might be expected to view gold as a compelling asset in a world where historically-robust systems have occasionally buckled. If there is a fault with gold it is perhaps that it has been too compelling for its own good. It seems right to write about it and surprising we have not before.