Since ancient times gold has been the currency of choice for everyone but it is not the only one, there are other precious metals such as silver, platinum or palladium that have a high economic value due to various factors including their scarcity or use in industrial processes; however throughout history few investments have rivalled gold in popularity as protection against almost any kind of problem such as inflation, currency fluctuations, economic turmoil or war.
Gold has been an essential component in the financial reserves of nations, for centuries countries have held gold reserves for a number of reasons but the main one is that it acts as an insurance policy against economic collapse. In the past, precious metals played a central role in the global economy because many currencies were physically minted using precious metals or backed by them, as in the case of the gold standard when central banks had stored tons of gold in their vaults that protected the banknotes and coins issued, although as I shared in another publication, one day US President Richard Nixon decided to withdraw his country from an important international treaty and ended with that standard and since then the United States has been printing green banknotes as if there was no tomorrow.
The current global financial system is based on fiat currency, i.e. paper money, which is gradually beginning to disappear in the face of its plastic or virtual counterpart, which we spend using our cards or mobile phones. But these banking applications or virtual money is still fiduciary (which has value because of the trust that has been given to it) and that is the main problem with this type of currency, which has no physical backing but that which is given to it by its issuers, i.e. the central banks of each country, institutions that are in charge of printing and giving value to our dollars, pounds, euros, pesos, bolivars or whatever.
However that does not mean that countries do not have gold in their vaults, they have it because it is a precious metal, scarce and has been associated with wealth and value for thousands of years, in fact since the 2008 crisis gold revalidated its value as a useful and valuable asset and its possession is not only a guarantee of solvency for many countries but people as individuals also include it in their investment portfolios as it is a good that does not lose value.
Of course, with the boom of cryptocurrencies, bitcoin and altcoins were included in the portfolios of many, some did well, others not so much after the collapse of the price of these due to the bankruptcy of the FTX exchange platform, so it is important that we compare the virtual with the material, the old with the new, because while no one loses confidence in gold, many cryptocurrency lovers are sadder and more desperate than football fans in a World Cup without beer.
Why is gold so popular?
Gold is a precious metal that has fascinated mankind since its inception not only for its lustre but also for the fact that it is resistant to corrosion, a good conductor of heat and electricity and easy to shape. The extreme rarity of this precious metal quickly led to its use in jewellery and to its becoming synonymous with wealth, high social status and power. The value placed on gold has led central banks to use it as a way of holding capital.
Investments in shares, bonds and other securities always have a risk, if things go wrong the prices of these can fall, even to the point of being worth nothing, but crisis or not a bar of gold is always good value. It can fall a little but its history shows us that over time it does not stop growing, we could say that gold is the anchor of confidence of the financial system since if everything collapses the existence of gold provides a guarantee to start again.
The power of a nation's Central Bank balance sheet in the worst case scenario to hold gold reserves provides a country with insurance in case fiat currencies collapse, unless you are like Venezuela and leave your bullion in the hands of the British and they confiscate it. And friends, if the fiat currency loses its value or falls to a minimum and the Central Bank of your country still has physical gold, debts can be paid and money can be issued, which is why in times of crisis and geopolitical turbulence like the one we are experiencing today, investors are increasingly leaving aside cryptocurrencies or certain debt bonds and buying gold as a financial asset because, as I said in previous paragraphs, gold is now synonymous with financial security and safety.
After the Second World War, in the midst of the Cold War and the fear that the United States put in its allies of a possible Soviet invasion of Europe, they took their gold to America, being the first world power and being geographically located far from the danger and a Soviet plunder in the event of a war in the old continent.
America as the world's leading power and geographically located far from danger and Soviet looting in the event of a war on the old continent. Over time, American and British banks gained a reputation for being the best at storing other people's gold, which is why many countries have gold stored in the United States or the United Kingdom (remember, if you are not allied with them they can freeze your bars, as is the sad case of Venezuela).
Although certainly if you are an ally of the USA and England you are not guaranteed the return of your gold metals, considering what happened with Germany's gold that cost them years of sweat and tears to only receive a fraction of their gold from the United States. Having explained the importance of gold in a nation's reserves, here are some facts of real interest.
In the midst of the initial financial and economic crisis in 2008 the central banks of various countries became net buyers of gold. Between 2009 and 2019 it is believed that the central banks of the world have stored more than 35,000 metric tons of gold which represents almost one sixth of the total amount that has been mined by mankind.
How much gold do we have?
Central bank reserves in tonnes of gold are estimated to be as follows:
- United States with 8,133.50 tonnes
- Germany with 3,159.10
- International Monetary Fund with 2,814
- Italy with 2,451.80
- France with 2436.50
- Russia with 2,290
- China with 1948.30
The appetite of mankind for gold makes its storage not easy, as we know many nations for security reasons choose to store their gold reserves outside their own banking systems, under the risk of suffering the same fate as Venezuelan gold. If we also include the IMF, the world's third largest holder of gold reserves, which has its headquarters in the United States, we realise that for the world's great economic power, this golden metal is of the utmost importance in the event of the definitive collapse of the fiduciary system led by the US dollar, as has been observed in recent years.
Considering the historical reputation of the US and British vaults as well as the fact that 72 central banks keep their gold in those countries, there is much fear that these reserves are liable to confiscation at any excuse (hello, Venezuela), but there is also the suspicion that much of the reserves in the custody of these countries are anywhere but in the vaults in New York or Fort Knox, with China being the main implicated party in this financial and geopolitical magic act.
Good for humanity, bad for the environment.
As a curious fact it is necessary to know that hundreds of years ago gold was not extracted but simply found in the form of nuggets in river beds or gold-bearing debris brought to light by erosion and the effects of climate, over time this surface gold ran out and now it is extracted with different methods, the most common being extraction with highly toxic cyanide that has a huge environmental impact.
Is Uganda the new Chinese Dorado?
Around 54,000 tonnes of gold remain in the ground around the world with the potential to be extracted at a reasonable cost with today's technology. According to the US Geological Survey's 2021 annual report, this is much lower than a news story that went viral on social media a few months ago when it was reported that Uganda had discovered a deposit of 31 million tonnes of gold. The news went almost unnoticed in the world's most serious media because there is no way of confirming such a quantity, and given the extremely high level of corruption in this African country and the fact that its government is desperate to find mining investments, I think that anyone with two fingers on their head would doubt such a figure presented by the Ugandan government.
The fact is that the 31 million tonnes of gold that Uganda claims to have on its land is far more than the 200 or 1,296 tonnes that have been mined globally in all of human history. Some analysts have come up with their own theories and the most logical one is that Uganda mistook tons for ounces and discovered not 31 million tons of gold but 31 million ounces of gold, which would represent 964 metric tons, which is also a significant figure but closer to reality.
Nevertheless, the Chinese government, through the Waka Way Gold Mining Company, has invested US$200 million to build a refinery in Uganda, asking the Ugandan government to grant it a licence to mine part of the Ugandan gold deposit. With a refinery already underway and the gold mine about to start, the Chinese company is expected to create some 3,000 direct jobs in the African nation and make China the world's largest gold producer with approximately 370 tonnes, representing 13% of the total amount mined globally last year.
How to invest in gold?
There are several ways to invest in gold, although there are two main ones: on the one hand, investment in physical gold in the form of bars and coins, and on the other hand, shares in exchange-traded funds or ETFs, which are paper securities that do not involve the delivery of physical gold. The latest reports suggest that demand for physical gold from small investors has soared in recent months while ETFs have plummeted because, of course, gold in hand is worth more than a paper gold certificate and as I said the most direct way to own gold is to buy physical bullion. In order for a gold bar to reach the hands of a client, it is necessary to go through certified entities that guarantee the weight and quality of the bar they offer. There have been cases of scams when it is a gold-plated tungsten bar.
Tungsten is a metal that has almost the same density as gold but is much cheaper, so be careful if you try to buy gold bars on Amazon or Ebay. Investing in gold jewellery is an alternative form of exposure to gold but it is not the same as investing in real gold. This is because jewellery includes costs that are extrinsic to its gold content which is never as pure as bullion. For example, jewellery often involves paying for craftsmanship and branding that are unrelated to the value of the metal.
Gold a victim of inflation (and the FED)
This year the value of Gold has behaved typically given that many of the elements that traditionally drive its value were present persistent inflation, war and a weak stock market; however the yellow metal has fallen in price by 10% in 2022 and much of those losses occurred in the last few months. But why have the currencies of our countries as well as the currencies of half the world and gold devalued, the answer lies in what we can call the effect of the Federal Reserve of the United States of America.
Throughout this year the FED has been aggressively raising interest rates in an attempt to reduce inflation in the United States and it was this unprecedented move that pushed the dollar to a new two-decade high to the detriment of most of the world's currencies, including those of the United States' top allies such as the euro, yen or pound sterling. As a result of US monetary policies, equities, gold and various national currencies have suffered, largely because commodity transactions including gold and other precious metals are generally conducted in dollars.
Another factor that has affected many currencies and the value of gold is the effect of the Federal Reserve's hike in US government bonds and since gold also competes with US government bonds as a safe-haven investment vehicle, and since investors can now get better returns from these, it is understandable that investors now prefer US government bonds to gold. However, it must be kept in mind that the monetary policies implemented in the US cannot last forever, so in a few months time gold will rise in price again and investors will invest more in gold.
Gold = BTC?
Some estimates say that in a few years' time an ounce of gold will be worth the same as a bitcoin. With all the ups and downs of cryptocurrencies, this is a rather risky prediction, even lacking in technical rigour. To begin with, there is little or no confidence we can place in any "expert" who might offer an opinion after what happened to the exhange FTX, which overnight went from being the paradise of cryptocurrencies to crashing, with billions of dollars disappearing from investors all over the world.
To me BTC and gold are reflections of the same image, in the sense that if they are not in your own custody they are simply not owned by you. What happened with FTX can be replicated in the world of gold, considering the web of banks and financial entities that have as dubious a reputation as cryptocurrency platforms, with products such as ETFs that offer no guarantees to the investor beyond believing what a piece of paper says.
BTC, like physical gold, will continue to rise in price over the years because they are scarce goods, unless Uganda proves that under its physical space lies a golden sea, in the event of proving such an abundance of this metal as the African country claims, the price would start to plummet, although something tells me that corrupt Uganda wants to sell us smoke, just like the "geniuses" of FTX on the cryptocurrency side.
