The psychology of investing in gold

By Larissa Fernand |  22-06-20 | 

Human civilization has an insatiable lust for gold.

Because gold is dispersed widely throughout the geologic world, it became prevalent in human cultures and religious ceremonies across the globe. Dating back millennia.

Last year, two large tombs were discovered and excavated at the site of the ancient city of Pylos in southern Greece. Inside the 3,500-year-old tombs, archaeologists found remains of gold jewellery and thousands of pieces of gold foil, remnants of the sheets of gold that once lined the tomb floors.

The ancient Egyptians considered it a symbol of eternity and referred to it as “flesh of the gods”. Consider the tomb of the boy-king Tutankhamun. He was enshrined in three gold coffins and his finery included a gold funerary mask.

Gold may no longer be used in tombs, but it does line the walls of the vaults of central banks.

Gold has been a symbol of wealth and power, a store of value, a means of exchange, legal tender, and has facilitated global trade. It is evident that it was considered the most powerful representation of wealth when nations adopted the gold standard which directly linked the amount of a nation’s currency in circulation with the amount of gold that it held in reserve.

A few generations ago, when our ancestors did not buy stocks, when there were no Gold ETFs, where investment options were extremely limited, gold provided a great deal of security due to its recognition anywhere in the world.

Psychiatrist Dale Archer, who discusses markets and human behaviour wrote in A Psychology Lesson: Chinese citizens have always bought and held onto as much physical gold as they could afford, because it’s ingrained after generations of instability. Forced to flee their villages and homes by famine, war and constant government repression, gold was the only thing they could take with them.

In The Great Partition: The Making of India and Pakistan, a Sikh woman Taran relates how her mother took all the gold and tied it in handkerchiefs and distributed it among different family members for safekeeping. We did not know where each of us would end up – this gold was our security.

You cannot talk of gold and ignore critical components of human psychology.

So when the debate on gold as an investment arises, it not as simple as it evidently appears to be. There are layered nuances that go into its timeless allure and mankind’s love affair with it over millennia.

It is fundamentally seen as a way to pass on and preserve wealth from one generation to the next. But it has also been a go-to investment during times of fear and uncertainty, which tend to go hand-in-hand with economic recessions and depressions, and conflicts, wars and geo-political turmoil. The security it gives to people, specially those who live in rural areas or volatile environments, is unmatched. As Warren Buffet once said, “Gold is a way of going long on fear”. Gold is a universal currency. If you have to flee to another land, your currency may be trash, but not gold.

David Tuckett, an expert in Economics and Psychoanalysis, and a Fellow of the Institute of Psychoanalysis in London, spoke about the cognitive and emotional narrative that surrounds gold as an investment. In an interaction with Wall Street Journal years ago, he said that gold has a deep meaning and fundamental connect for most humans, since there is a shared consensus about its attractive element and acceptability.

The perception of an investor when he or she buys gold could be radically different from the frame of mind when other investments are considered.

If you are considering buying gold, ask yourself what the narrative is that is framing your point of reference.

  • Is it fear that is driving you? Fear of social unrest? A civil uprising? A war?
  • Are you concerned about hyperinflation? In such a situation it is understandable if you want your money to be best preserved in gold.
  • Do you believe that you are well positioned in the gold cycle to take a tactical bet and exit when you make a tidy sum?
  • Are you using it as a hedge against the depreciation of the rupee?
  • Are you using it as a portfolio diversifier?
  • Do you have an exit strategy?

Take a step back and answer these questions to reveal whether your decision is based on emotion or fear or knowledge. Once you do that, you will get much more clarity as to whether or not you need gold, and in what form.

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