A couple of months ago, my colleagues published a blog that talked about gold as an asset class. Since then, gold has rallied a further 20% before a taking a breather of sorts last week (still up almost 50% since March). Here’s Ruchir Sharma, the head of emerging markets and chief strategist at Morgan Stanley Investment Management, talking about why it is tempting to look at gold as a safe asset in crisis times such as the current pandemic and also as a hedge against inflation, likely thanks to the enormous amount of fiscal and monetary stimulus from governments and central banks across the world. More importantly, he talks about why this isn’t a good sign from an economic standpoint given the little productive use of gold and why therefore all those household savings chasing gold is detrimental to progress. The sooner we have a vaccine and the resulting withdrawal of stimulus and real interest rates coming back to healthy levels from the current negative rates, money can be channelled towards more productive use.
“A recent survey of 1,000 people found that one in six Americans bought gold or other precious metals in the last three months, and about one in four were seriously thinking about it. On Robinhood, the popular online trading platform, the number of users holding two of its largest gold funds has tripled since January.
…Owing to its image as a stable store of value when others are shaky, gold has held up better than other commodities, but it still hasn’t been a dynamic investment. Over the past century, the price of gold, adjusted for inflation, has risen by an average of just 1.1 percent a year, compared with 6.5 percent for U.S. stocks. Even the 10-year U.S. Treasury bond, considered the most risk free asset in the world, has produced higher annual returns.
…In 2019, after the Federal Reserve signaled that it was suspending plans to push interest rates higher, gold mounted another ascent. Historically, gold has done best when interest rates fall below the rate of inflation. As the inflation-adjusted return on bonds turns negative, investors feel comfortable owning gold as a store of value, even if it yields nothing.
That is what has been happening over the past few months. With bond yields near zero in the United States and negative in Europe and Japan, investors have driven up the price of gold more than 30 percent this year after a gain of nearly 20 percent last year. In recent weeks, that surge has been turbocharged by growing expectations that all the money governments are pumping into their economies will reignite inflation.
…For gold to keep rallying, expectations of inflation will have to keep rising. Anticipating higher inflation has been a losing bet for a large part of the last four decades, but the odds appear better now. Most nations are doling out record levels of stimulus at a time when forces like globalization, which kept inflation in check, are weakening. Normally, if inflation looms, central banks can be relied on to raise interest rates, but Fed officials have signaled that they aren’t “thinking about thinking about raising rates,” and do not expect to move before 2022.
…The wider risk is that this kind of purely financial speculation undermines the economy by sucking capital away from industries that will put it to more productive use.
As an investment, gold has none of the virtues I admire, like innovation and dynamism, and many of the vices I despise, including the “rent seeking” mind-set typical of extractive industries. But these times aren’t normal. Unless a vaccine emerges quickly, central banks stop printing money frantically and real interest rates start rising again, it is difficult not to be a gold bug now.”

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