(Photo: Bloomberg)
(Photo: Bloomberg)

Opinion | A gold rush caused by currency fragility

Global investor Mark Mobius expects the price of gold to go up as money supply expands. Does this flight to metallic safety reflect an anxiety over the dollar-based financial order?

As an investment, gold is not an “asset", strictly speaking. It is scarce and valuable, but its possession yields nothing (even if you can sell it at a higher price for capital gains). Nor does money put in it do anything for the economy. Economists have long sneered at the yellow metal as a “relic" of the past. The allure of its glitter, however, has risen lately. Savvy global investors are advising us to buy it. Mark Mobius of Mobius Capital Partners would have us acquire gold “at any level", expecting it to go “up, up and up" in the long term. The reason for this, according to him, is that central banks are in the process of supplying money in a great gush of liquidity. If the supply of currency units far exceeds what can be absorbed by productive activity, then it would diminish what that cash can buy, reducing its actual value as a means of exchange. Gold, however, suffers no such debasement because its supply is limited by nature. So, when uncertainty hits other assets, money starts flowing into it. As a store of value, gold is safe. Advocates of cryptocurrencies portray these electronic units as similarly shielded from the effects of oversupply, but these are “psycho" currencies in Mobius’s view, since they are based merely on people’s faith in their value.

That gold is on the rise is evident. Its global price has gone up by 17% so far this year. As fears of a recession spread in the US, more investors may seek refuge in the metal. Much of the world’s troubles have to do with the US-China trade war. The protracted battle between the world’s two largest economies is acting as a drag not only on their growth, but also on others’. To counter recessionary trends, monetary easing is usually the first policy response, and that has begun in much of the West. The US Federal Reserve is under pressure from the White House to cheapen credit even further. All this is consistent with what Mobius has spoken of.

Yet, there may be more to the ongoing flight to safety than just recession worries. There are signs of anxiety over whether the current dollar-based financial order will survive for long. Ever since the US abandoned gold in 1971 as an anchor for its dollar, the world has relied on the US’s “strong dollar" policy; it serves as a reserve currency on the rationale that it would not lose value. But the US now seems keen to let its currency slide as a way to blunt the edge of its trade rivals, a game that China is a seasoned player at. What began as trade hostility now threatens to escalate into a currency war, with the risk of competitive devaluations sending global commerce into turmoil. If this were to occur, it would bear an eerie similarity with what happened in the Great Depression era once gold was given up as a standard to fix the value of currencies. It was at the Bretton Woods conference of 1944 that major countries agreed to use the dollar as a peg for their own currencies, with the US currency backed by gold. Once the US delinked the dollar from the metal 27 years later, it was the US’s job to command faith in its value. This spelt a strong dollar. But with “America first" as Washington’s new mantra, the old order cannot be taken for granted anymore. No wonder investors are so nervous.

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