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Category: Soap Box

Soapbox: Why hold gold?

The conventional answer to this question is that gold is "a form of saving for a rainy day", a form of "financial insurance. You shouldn't trade your...

25 February 2021

Gary Mead

The conventional answer to this question is that gold is “a form of saving for a rainy day”, a form of “financial insurance. You shouldn’t trade your gold. You wouldn’t trade an insurance policy, so don’t trade your gold”.

On this outlook gold is static, inert, a kind of escape hatch for when everything goes pear-shaped. It’s a mistaken view, or at best only half-true. The escape hatch scenario comes into focus when some dramatic geo-political event occurs and heightens uncertainty, such as the bombing of the Twin Towers on 9/11 2001 – the gold price spiked from $273 per ounce in the morning of 9/11 to $290 but by 24 November it had retreated to around $272. Uncertainty created nervousness which led people to buy into gold’s escape hatch scenario. Those who bought gold on 10/11 2001 will have felt themselves to be mugs come November that year – unless they held onto the gold for much longer.

Of course, gold is not the only, nor even the most commonly-used form of money – fiat money, paper currency defined and legitimised by a national government, is most commonly used today. In 2001 it was not easy to use gold as money.

One of the defining characteristics of a paper banknote is that it is for a set value – a £20 note is ‘worth’ £20, and a $10 bill is ‘worth’ $10. On a £20 note is written over the signature of the chief cashier “I promise to pay the bearer on demand the sum of twenty pounds”. On the back of a $10 bill are the words “this note is receivable by all national and member banks and federal reserve banks and for all taxes, customs and other public dues. It is redeemable in gold on demand at the Treasury department of the United States in the city of Washington, District of Columbia or in gold or lawful money at any federal reserve bank”. But don’t trek to 1500 Pennsylvania Avenue in Washington D.C. to try to redeem your sawbuck for gold. It’s an empty promise. But it is at least a tacit recognition that gold is money, or ought to be usable as money.

 

30 years of the gold price, inflation adjusted /source https://www.macrotrends.net/

 

A very different world in two decades

The gold price ended 2020 around 25% (in US dollar and pound sterling terms) higher than at the start of that year and peaked at more than $2,000 (£1,559) an ounce in early August. It’s lost some 11% since that price peak, which has disappointed some gold holders – no-one ever likes to see their assets lose value.

But we need to remind ourselves why we bought gold in the first place. Is it something we acquired simply because we imagined the price would continue to rocket, or because we prefer to use gold as money? Do we buy it with a time-horizon of six weeks – or six years? Do we buy it simply in the hope that – as in the past – it has steadily increased in real (i.e. inflation-adjusted) terms? Or do we want to use it?

The world in 2021 is unimaginably different from 20 years ago. The internet is a genuine social and economic revolution. It has brought solace this last year – we have been able to stay in touch, buy goods and food, exchange information and many of us have been able to keep working, all thanks to the digital age. And yet it has also fostered heightened anxiety, as we have impotently been able to watch the relentless creep of authoritarianism (in the US, Belarus, Myanmar, China, Russia to name only the obvious spots) in a world where the diet of 24/7 information is relentless. Back in 2001, this newsletter could not have been sent to you instantly. It’s almost as if we are daily bombarded with mini-9/11s; we have experienced two major financial disasters, in 2008 and 2020, the repercussions of which are far more profound for everyone than 9/11. As we emerge into a post-Covid world, the uncertainties will not end.

Glint stands for stability

At Glint, we believe that gold is money – a means by which individuals and businesses can exchange goods and services – and is not a purely speculative asset. This is, for us, one of the greatest contrasts with cryptocurrencies, which cannot easily be used as money and which – although currently largely independent from government interference – are nevertheless a human creation and therefore open to manipulation.

Gold no doubt still has its escape hatch qualities, particularly perhaps in an era when asset bubbles seem to be building everywhere – since March last year, world stocks have risen in value by $6.2 billion an hour, ten times faster than the growth seen after the 2008 financial crisis. Meanwhile, 10 million jobs that existed in the US at the start of 2020 have disappeared and the UK unemployment level has reached more than 5%, with younger people being the worst affected in both countries.

Money ought to be something which is prized and held in esteem, a cornerstone of democratic stability. Yet under the weight of Covid-19 the fiat money aid packages now planned are likely to take the shine off that US dollar, thanks in part because they are inequitably distributed; President Joe Biden’s $1.9 trillion making its way through the US Congress will (if unaltered) dish out 61% of the aid to states that voted for him last November.

One of the many benefits of the development of the internet was that it enabled a rash of innovative thinking and practice around money, banking and financial services. It enabled the creation of fintechs such as Glint. Glint’s long-term mission is to restore gold to its ancient role as money. With Glint you can use the gold you buy as money, i.e. you can spend it in your daily life or save it. You don’t have to indulge in celebrity-driven asset bubbles, or watch as your fiat money steadily loses value – today’s dollar will buy you just 15.5% of what it did 50 years ago. With Glint gold is no longer just an asset – it’s also something you can use as money.

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