Investment special: The case for gold

Few assets are more misunderstood than gold. I might even refine that statement — if you’ll pardon the pun — and say that few assets are more misunderstood than money. Gold happens to be both. Technically, of course, we are constrained by government edict to use pounds sterling for the payment of our taxes and debts. My take on this dismal state of affairs, but also my optimism, can best be summarised in the title of Nathan Lewis’s recent book, Gold: The Once and Future Money.

Economists give money three attributes. It should be a unit of account (we can price things in it). It should be a medium of exchange — which avoids the inconvenience of barter. And it should be a store of value, something which enables us to maintain our purchasing power in real terms if we choose to defer spending and save instead. Our current ‘fiat’ paper money does a passable job of the first two, but is disastrous in relation to the third. To put it another way, since the 1913 establishment of the US Federal Reserve, which acts as America’s central bank, the US dollar has lost 98 per cent of its purchasing power. Over the same period, sterling has done even worse.

The likes of gold and silver developed as money in a free market. They were in competition with all kinds of other ‘monies’ such as cattle, shells, nails, tobacco and cotton; and they won. People tended over time to favour the precious metals as money because of their scarcity, durability, malleability, and beauty. Using paper certificates to represent reserved gold was a logical next step. But then the rot set in, when greedy bankers realised that they could print certificates for more physical gold than they actually possessed.