A twist in the gold story

After a long time - not just years but decades - the story of gold as an investment has taken an interesting turn. A year ago, in a newspaper column, I wrote this: "As we all know, in early 2022, the United States and its cronies decided to confiscate the Russian Central Bank's assets deposited in Western banks. Whatever impact this had on the Russian economy is not my topic today. Still, it did make everyone else in the world realise that it was now risky to keep national reserves in dollars in banks controlled by Western governments. Since then, practically every central bank in the world has started shifting assets held in national reserves from dollars to physical gold, with the Chinese taking the lead, predictably. Of course, this shift cannot be rapid because that itself will destroy the value you hold, but the trend's direction seems clear at this point."

Well, now it's more than two years since the war began, and the Americans started the anti-Russian sanctions and the confiscation of Russian assets. You can draw your own conclusions about the efficacy of these actions, but that's not my topic today. However, people who invest in gold have every reason to thank both the Russians and the Americans for their respective actions. Since February 2022, when the war began, gold prices are up by 45 per cent in rupees and about 40 per cent in USD. Central banks are buying gold at a steady pace, and what they are doing may well go on for a long time. Their actions are entirely understandable. They want a store of value that the US government cannot destroy on a whim. Even if gold falls 20 per cent, that's still better than the zero to which Russia's deposits in Western banks have fallen.

So what does it mean for you and me in our personal investments? Should I - who has always been a gold sceptic - change my tune? I have always believed - inspired by no less a figure than Warren Buffett - that gold was a relic, a non-productive asset that sat idle while stocks and bonds generated income. Could it be that the geopolitical landscape has shifted dramatically, and with it, the calculus for safeguarding wealth? It's possible that the rise in gold prices is not just a temporary spike but a reflection of a fundamental change in how the world's government reserves are managed, which could have a cascading effect down to us individuals. Is it time to rethink our strategies and consider that a prudent allocation in gold could provide a hedge against these unpredictable global events?

To repeat the old joke, the answer to these questions is a definite maybe. Apart from being a commodity, in its financial role, gold has two different personas - as an investment that one hopes will appreciate and as a currency. While gold has functioned as a global, supranational currency for thousands of years, this role has declined during the twentieth century and the US dollar has replaced it. Now, thanks to the geopolitical shift that has started, a sort of a reversal could happen.

As for what an individual should do about this, it is no longer an obvious argument that gold as an investment is useless. Diversifying one's portfolio to include a portion of gold could offer a safety net against potential financial turbulence. Given the current trends, it might be wise to allocate a small percentage of your investments to gold, balancing it with other assets to mitigate risks and capitalise on its potential as a store of value. The changing global dynamics have redefined gold's relevance, making it a worthy consideration for modern investors seeking stability in an uncertain world.

Again, these are deep waters, and nothing is actually predictable. Nonetheless, individual investors need to be aware of the shift that has started and is now threatening to accelerate.

Also read: Three reasons why gold has surged 20 per cent in last one year