23rd April 2023 - Gary Mead - in Gold

Calculating trust

‘Why is the gold price rising?’ A question we’re often asked. The obvious answer – more buyers than sellers – just begs the question. We try our best to come up with better answers, rational answers grounded in empirical evidence. Sometimes however they seem inadequate to explain longer-term movements. Since the start of the 21st century the gold price, while moving up and down over short-term periods, has generally been in an upward trend.

Why did the Dollar price of gold rise slightly, by about 0.4% (or fell slightly, according to other sources, by about 0.2% ) last year, when inflation was approaching an annualized 10% in the US and Europe, but in the first three months of this year has risen by almost 8%, when inflation appears to be cooling?

The preferred ‘rational’ explanation is that last year the US Federal Reserve was in the process of pushing interest rates up, thus strengthening the US Dollar (and concomitantly reducing the attractiveness of gold to big investors), whereas this year those same big investors sniff a change in the wind, that the Fed may be coming to an end of interest rate hikes, perhaps even moving to interest rate cuts, which would weaken the Dollar and thus make gold more attractive. But the chart above shows that gold started its climb long before the current headline worries about inflation and interest rates appeared.

Clearly something deeper is going on in the background that is very difficult to prove but which – we sense – is an important factor as to why gold is incrementally stepping higher. Arguably gold is benefitting from an inchoate but widely sensed opinion that trust is becoming a scarce commodity.

Trust in governments, banks, media, the police, education, and institutions generally has been eroded. Trust in fiat currency has been badly dented, thanks to high inflation.

There is a widespread concern, scarcely articulated because perhaps we lack the language with which to articulate it, that the familiarity of our societies is unravelling, that things are coming apart at the seams. But does this gut feeling have anything by way of supportive evidence? Is there a chart that might begin to tell this story?

Fortunately there is, thanks to a friend of Glint, the former precious metals’ analyst of various investment banks, Andy Smith. He has constructed the chart below, which he explains thus: the blue line is the gold/platinum price ratio, and is a proxy for ‘fear’ versus ‘hope’. Gold buying, he argues, is based on economic/political fear, whereas platinum buying is based on economic/political hope. The red line is an average of 14 Gallup polls assessing the percentage of mistrust in US institutions. The more mistrust, the more fear investors should rationally display. The chart makes clear that investors are, over time, preferring gold over platinum, evincing growing mistrust in a wide range of institutions.

This analysis may be flawed. If any reader spots flaws please let us know. It is limited, in that it refers to US institutions only. Some may take issue with the suggestion that platinum can be a proxy for economic/political hope, and gold for economic/political fear, even though platinum’s major use is industrial, while gold is primarily used as decoration (jewellery) or as a defensive asset and only latterly as money thanks to Glint. But the chart is a start.

At Glint, we make every effort to demonstrate a balanced conversation between gold, crypto and fiat currencies when it comes to purchasing power and, while we strongly believe that gold is the fairest and most reliable currency on the planet, we need to point out that it isn’t 100% risk free. While we have seen a steady increase over time, the value of gold can fall, which means that its purchasing power can also decline.