Gareth Howlett: Clever investors look to the fields of plenty for healthy returns

I WAS once browsing the memorials in Exeter Cathedral – I know, some people live only for pleasure – when I came across a tribute to an eminent 18th century cleric. Among his many virtues, “he was an enemy of enthusiasm in all its Forms”.

I felt a surge of sympathy because the word “enthusiasm” at that time was often used to describe fanaticism. Ours is a business with more than its share of big brains and big egos, so this noxious weed crops up in quite a lot of places. But there are some corners of the field where it is particularly widespread.

For the past year or two, it has been hard to avoid being harangued by gimlet-eyed gold bugs eager to tell you how almost every asset in the world is liable to collapse in value and the best protection is to buy lumps of the yellow metal.

The gold bug is convinced that governments and central banks worldwide are engaged in a conspiracy to defraud savers. I can’t help thinking of the General in Dr Strangelove and his paranoid fear of “the communist threat to our precious bodily fluids”.

When currencies were either physically made of gold or backed by gold held in Fort Knox or Threadneedle Street, the overall level of prices was remarkably stable over the long term.

Inflation and deflation occurred, but they were cyclical episodes usually associated with fluctuations in output (good or bad harvests, wars, plagues and famines) or disruptions to money supply (the increase in gold and silver in circulation after the Spanish conquests of the Americas). Since the abandonment of the gold standard, paper money and its electronic derivative have been backed by the promise of governments.

And governments that like to dole out sweeties to their electors but don’t like paying the bills have found it dangerously easy to reduce the real size of those bills by printing more money to pay them.

This is one explanation of how inflation became embedded in most economies during the last century; even during the so-called disinflationary 1980s and 1990s, the real value of money fell by more than half.

In economic theory, money has three functions: it is a means of exchange (you can buy stuff with it now); a store of value (you can buy stuff with it later); and a unit of account (you can work out how much different kinds of stuff are worth). All these apparently simple functions are supported by a complex network of formal laws, coercive powers and unwritten but influential social conventions.

Gold coins bearing Caesar’s head are valuable not just because they are made of gold but because Caesar’s courts and armies protect our right to use them for trade in any part of the empire and beyond, and because it is far easier to trade Spanish wine for Egyptian wheat using money than by barter.

When Caesar is short of cash to pay his armies, he has a sneaky habit of clipping fragments from all the coins in the treasury and melting them down to make more new ones, or melting down the whole coins and adding a cheap base metal with the same devious end in mind. This keeps the troops happy in the short term, until they notice the rising price of wine and bread.

Governments and central banks don’t control the world’s gold supplies any more and coin-clipping is being carried out through quantitative easing and similar methods. This may be morally questionable, but it could be the only realistic way of getting out of the debt predicament in which we find ourselves.

It does heighten the attraction of gold as a store of value and the smart money may well continue to buy gold; but the smarter money will be out in the market looking to buy vineyards and wheatfields.

• Gareth Howlett is fund manager director at Brooks Macdonald Asset Management