Bill Jamieson: Gold keeps allure as money called into question

What counts as money today? What counts as wealth? So fundamentally obvious are the answers to these questions it hardly seems necessary to consider them.

Picture: PA

But consider them we must. In a world of looming deflation and negative interest rates the idea that wealth can be accumulated in the form of fixed interest savings and bank deposits has to be reconsidered. And amid the intensifying drive to internet banking and electronic transfer, the belief that notes and coin will continue as “money” in the sense we understand it is also coming under question.

After seven years of “short term emergency action” – ultra-low interest rates and money printing by central banks – little wonder the conventional wisdom of saving has come under question. The rewards of fixed interest saving have not just sunk to almost nothing – they are now vulnerable to the growing resort to negative interest rates – punishment for savers – as central banks seek to stimulate spending and stave off deflation.

Concerns have been eased to some extent by the rise in asset values following quantitative easing. Prices of land, property and equities have risen. Those holding such assets have done well in this phase. Those who were not now find the disparity in wealth all the more galling.

And as the resort to emergency measures has continued, the question it poses becomes more acute: what happens when central banks seek to return to normal policies? Indeed, what happens should emergency stimulus finally succeed – and inflation returns? These are the concerns behind the recent remarkable rise in the gold price. It has risen from around $1,050 an ounce in January, to $1,232 today, having brushed above $1,250 late last month.

Conventional wisdom tells us this should not happen. Gold is seen as a hedge against inflation – not the long period of low inflation and in some countries deflation – that now troubles central banks from Europe to Japan. I sense that three concerns are now coming to the fore. The first is growing doubt as to whether central banks really know what they’re doing. Other factors lie behind the reluctance of businesses and households to spend other than the price or availability of money.

The second is that there are massive latent inflationary pressures in the pipeline. It is impossible to predict when these might erupt or what the catalyst might be. There is evident apprehension that central banks might resort to even more radical measures to stimulate their economies.

And the third is rising geo-political tensions – particularly in Europe where the massive flow of populations fleeing war-ravaged regions and the poverty that follows is now beyond the control of European governments. A backlash against the mass immigration of Muslim populations and the extreme Islamicist cells hidden within this movement is feeding the rise of a fear-driven and less tolerant politics across Europe.

Thus, far from the price of gold falling further, it has been experiencing a rise in demand – and when supply has contracted after the commodity price falls of recent years. Against this backcloth, the latest book by US economic commentator James Rickards – The New Case for Gold – boldly sets out the case for investing in the precious metal, both as an irreplaceable store of wealth and as a standard for currency. His advice to private investors is to hold some 5 per cent of a diversified portfolio in gold or gold related assets.

I particularly liked his comparison of central bank response to the financial crisis to sending out the Army Corps of Engineers to make the San Andreas Fault bigger. We know it is an earthquake risk, we don’t know the timing of the next quake, but no-one thinks it is a good idea to make the fault line bigger.

Rickards’ analysis echoes concerns of Russell Napier, financial strategist, bear market expert and the inspiration behind the Edinburgh-based Library of Mistakes. Interviewed by MoneyWeek editor-in-chief Merryn Somerset Webb, he views various ways in which governments could get inflation back into the system – including in the US the forgiveness of $1.1 trillion worth student debt.

He sets out the prospect next year of the US Federal Reserve under pressure for more radical solutions – a growing frustration that monetary policy hasn’t worked and we should try something else. “Things that were extreme five years ago are now just below the surface.” And gold is going up because of a belief that stronger and more robust central bank action is closer than previously. When the price starts going up “and the dollar goes up, it’s entering a 20-to-30-year bull market. I think that’s just started.”