Sarun Lerdhirunwong

From my discussion about the monetary history of gold in the previous article, "Timeless Passion of Gold, Part 1", gold had been considered as 'real' money throughout the history of monetary instruments. Although civilisations have switched to using fiat (paper) money as an official medium of exchange instead of gold; gold is still a material with full qualities of exchange. As time passes, gold has become a commodity that can be bought by money instead of a monetary instrument that is used for purchases of other commodities.

As a commodity, gold is viewed as an asset for investment like stocks, bonds, options etc. The purpose of which is for speculation (betting on capital gain). Nevertheless, investing in gold might not be as exciting as investing in other investment vehicles according to the general notion of investment strategies. Gold only gives out capital gain (or loss) when you sell it; it does not give out cash flows like bonds or stocks; and the price moves relatively slow. Therefore, the realisation of gain (or loss) could take a long time and possibly lead to opportunity loss. Moreover, gold is not an asset that is appropriate for daily trading because of its illiquidity, with one exception for Gold Futures, GF.

So if gold is not deemed as a good investment choice, should it still be worth gaining our attention?

The answer is yes, especially when governments around the world are struggling to secure their fragile economies by injecting massive amounts of money into their economies at the speed of light through Quantitative Easing and other economic stimulus packages. This can raise the inflation expectation and eventually deteriorate the real value of currency. As currencies lose their values, more people are turning their interests to gold; for example, emerging markets like China and India are investing more in gold and pushing the demand for gold up even further; hence, gold prices skyrocketed. The nominal price of gold reaches "All Time High" again and again, outstripping the gain in all other major currencies. The higher price does not mean that gold is becoming more expensive; instead, currencies are becoming relatively cheaper. Do not forget that the background of gold is real money; it has retained its real value as it always has since the gold supply has neither increased nor shrunk much. Looking at it this way, the gold price only reflects what is going on in the economy or the reaction to monetary policies, not the other way around. Therefore, whenever there is a crisis followed by excessive liquidity, the nominal gold price will rise with inflation as opposed to banknotes that will easily be impaired during high inflation. This is why gold is one solution for inflation hedging, to be more precise, a crisis hedging.

The inherent value of gold is the reason why gold is an appropriate tool to hedge against inflation. Since its value does not get diluted with inflation, its demand increases every time there is inflation. To elaborate on that point, imagine an 80-year-old granny digging up her treasure she buried in her backyard when she was twenty, if that treasure were a one-dollar banknote, the banknote would worth nothing compared to its value 60 years ago; on the other hand, if the treasure were a gold bar, it would be worth a fortune comparing to when she buried it. Amidst the uncertainties of economic outcomes, which significantly affect the value of currencies, the store value of gold is one certainty that people can rest upon. Thereby, given the current situation of a weakening dollar, gold has once again regained its popularity.

All being said, I want to summarise that gold should rather be viewed as an object that can naturally maintain its value and used as a store of value than being viewed as an investment alternative that yields returns. Gold has inherent value that can't be controlled, at least not as much as with paper money. So buying gold would be a wise decision if you were to believe that 600 billion dollars from QE2 is just an appetizer and needs protection for the upcoming bitter main course. All in all, gold could never be overshadowed by the storms of financial catastrophe. Gold still holds its major role in the world economy from generation to generation.

People still desire gold as they ever have; this is truly … the "Timeless Passion of Gold".

The opinions expressed in this article are the author’s own and do not necessarily reflect the official opinion of the Bank of Thailand.