Humans have a voracious appetite for gold.
Because gold is dispersed widely throughout the geologic world, it became prevalent in virtually all human cultures dating back millennia.
In Bulgaria, archaeologists have found decorative gold objects dating to about 4,000 B.C. The Egyptians had an insatiable lust for gold. Descriptions of the yellow metal appeared in hieroglyphs as early as 2600 B.C.
When King Amenhotep III ruled Ancient Egypt, it had become the richest and most powerful nation on earth. He had one great advantage - gold. The letters that went back and forth from pharaoh's court show that even the kings of the Near East were desperate for Egypt's gold. They were willing to give their daughters in marriage in exchange for gold. One of them is to have said, “In your country gold is like dust and you can just gather it up. If it is your intention that a sincere friendship exists, send much gold."
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.
In 2019, 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 bee-hive shaped tombs.
Gold may no longer be used in coffins or tombs, but it does line the walls of the vaults of central banks.
Since gold has such a monumental history with mankind, you cannot talk of gold and ignore critical components of human psychology.
Generations ago, when there were no Gold ETFs or gold bonds, where investment options were extremely limited and the stock market was the playground of a few, gold provided a great deal of security due to its recognition anywhere in the world.
Psychiatrist Dale Archer, who discusses markets and human behaviour, in an article in Forbes wrote about how 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 book “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. Her words are as valid today as they are then: “We did not know where each of us would end up – this gold was our security.”
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. As Warren Buffet once said, “Gold is a way of going long on fear”.
It could be as extreme as war and geo-political turbulence resulting in humans fleeing as refugees. Or, it could be the more familiar economic recessions and depressions. The security it gives to people, especially those who live in rural areas or volatile environments, is unmatched. Gold is a universal currency. If you have to flee to another city or country or continent, your assets and currency may lose all value, but not gold.
David Tuckett is an expert in Economics and Psychoanalysis, and a Fellow of the Institute of Psychoanalysis in London. In an interaction with Wall Street Journal in 2012, he explained that there is a cognitive and emotional narrative that surrounds gold as an investment. It has a deep meaning and fundamental connect for most humans, based on a shared consensus about its attractive element and acceptability.
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.
Gold has a dual identity. It shares some commodity characteristics with other metals (mining supply, demand for the metal), and also boasts of a clear monetary identity (held by central banks). 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.
Gold has always been a symbol of wealth and power, a store of value, a means of exchange, legal tender, and has facilitated global trade.
From an end user perspective, it has industrial use as well as personal consumption. The latter could be for adornment, to pass on a legacy for the following generation, or an investment that has a unique and appealing universal quality. But there is also an underlying psychological attraction like no other.
This is why the perception of an investor when he buys gold could be radically different from the frame of mind when other investments are considered. An investor knows that he will have to pay an insurance premium if he chooses to insure the “investment”. Maybe storage costs too (bank safe deposit locker). He will get no dividends or interest. The money he gets when selling will depend on how much it costs at that time. There is no intrinsic worth, as one can arrive at when evaluating a business and its listed stock price. But, this is gold.
Hence, if you are considering buying gold, you must ask yourself what the narrative is that is framing your point of reference.
Questions to ask before you buy gold
* Fear. Fear of social unrest. Civil uprising. War. Market collapse. Or maybe, it is just a security against any eventuality.
* Inflation. When it comes to hyperinflation, it is good to have your money preserved in gold.
* Tactical. Do you believe that you are well positioned in the gold cycle to take a tactical bet? If yes, what is the absolute return you are looking at? Be clear about your exit strategy.
* Hedge. It is a hedge against the depreciation of the rupee.
* Diversification. It is a good portfolio diversifier.
* Legacy. Are you buying it to pass it on to the generations that follow?
* Love. Are you buying it for adornment?
Answering the above will give you clarity as to whether your decision is based on fear or knowledge. It will also help you figure out the form of holding. For example, jewellery will be the option for adornment, but a bullion bar would be for fear of social unrest. Do you want to pass down jewellery to your grandchildren or bars? If it is a tactical bet, would a Gold Exchange Traded Fund (ETF) do?
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Larissa Fernand is Senior Editor at Morningstar India. You can follow her on Twitter.