Gold doing what it does best – Part I

by
Claudio Grass
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Gold’s stellar performance throughout the pandemic and especially over the last weeks has managed to capture international headlines and dominate expert analyses and commentary. The media frenzy quickly intensified once the precious metal first broke the $2,000 ceiling in early August, a record that was widely covered by mainstream outlets, bringing gold to the attention of the wider public. So far, the rally been described as “exceptional”, “historic” and “extraordinary”, showing how surprised many in the industry were. Personally, it is precisely their surprise that I find surprising.

Reliably predictable and predictably reliable 

Precious metals have so often been attacked and dismissed as an asset class because they offer no yield and mainstream analysts and financial advisors frequently push them aside in favor of more “interesting” options. Especially over the last decade, gold and silver have widely been seen as boring investments that serve no real purpose in an environment where inflation appeared to be dead. Those of us who still insisted on keeping physical metals as a considerable part of our portfolio and who saw their value as an insurance and a hedge, were often looked upon as quaint and eccentric by mainstream investors that were betting everything on a permanently rising stock market. And yet, even the staunchest detractors of gold, even those that never even considered holding a precious metals position, could not deny their historically consistent and essential role in a harsh crisis scenario. They just never expected to find themselves in one.

This turned out to be a very expensive mistake indeed. The global economic crisis that was long in the making, but exponentially worsened by the lockdowns and the shutdowns imposed by governments all around the planet, has introduced too many forces and too strong a case in favor of precious metals. For long-term gold investors, this was, of course, a vindication and a reward for our patience, but most of all, it was a very important confirmation that gold can still do what it does best and what it has done for millennia: protect and preserve value against uncertainty and against the vulnerabilities of a blatantly unsustainable financial system. 

In a world where nothing seems to make much sense anymore, it is good to know that at least one asset class is behaving the way it is supposed to. The artificial stock rally that has been pumped by irresponsible policies, cheap credit and blind greed over the last decade, now seems totally absurd, divorced from reality and in sharp contrast to the real economy. Its unsustainability is no longer obvious only to “insiders” and experts, but increasingly, to the wider public as well. 

News of the Nasdaq breaking new record highs in the backdrop of record unemployment levels and a landscape of economic destruction is predictably making retail investors and ordinary savers question everything they thought they knew about the markets, about the forces that supposedly control them and most importantly, about their own financial future. It is thus no wonder that their trust is shaken in “conventional” investments and saving vehicles. It is even less surprising that a growing number of them now turn to gold and silver, running for cover, and pushing prices to new highs. 

A crisis like no other

There have been too many hypotheses and “expert” analyses about what’s driving this rally in gold. Some say it’s inflation concerns or geopolitical tensions, others point to the supply crunch back in the beginning of the global lockdown. Some of those chronically hostile to precious metals even tried to explain away the surging demand as the result of the irrational fears of inexperienced, panicked retail investors. And yet, one really doesn’t need to look too far or too deep to find the reasons for this rally. 

The global economic crisis that we’re currently facing is unprecedented, the financial toll it has already started taking from billions of people is unimaginable and most of us are simply staring at an unknown and unknowable future ahead. The moment that governments crossed the Rubicon and pulled the “off switch” on most economic activity, banned trade and outlawed productivity, we all woke up to a brave new world, where the “rules” are no longer what we thought they were. The moment our rulers proved they could deprive citizens of their livelihoods, unilaterally, by decree and without any opposition or democratic debate, we all were plunged into uncertainty, as it became clear that, having done it once, they can do it again, and again, and again. 

Who can reasonably plan ahead under these circumstances? Who can trust the economic and financial system and its tools, knowing that they can be used against them at any moment? Why bother playing a game that has no rules and that has been rendered unwinnable? Under these conditions, there is no conventional asset class or saving vehicle that is out of reach of governments and central bankers, or immune to their manipulations. There’s only gold.

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In the upcoming second part, we look at the bigger picture, at the unique challenges and unprecedented risks that this crisis has introduced and at the ways in which conservative, responsible investors and savers can mitigate them. 

Claudio Grass, Hünenberg See, Switzerland

This article has been published in the Newsroom of pro aurum, the leading precious metals company in Europe with an independent subsidiary in Switzerland. 

This work is licensed under a Creative Commons Attribution 4.0 International License.