Political Turmoil and Gold

The British establishment have made a pig’s ear of the Brexit negotiating process.  It is impossible to second guess the next move because the political elites can’t stand up to Brussels and get neurotic about speculation of trucks backed up miles at Dover   We can’t predict what will happen so we won’t comment any further.

There is a conventional wisdom when there is heightened political turmoil gold tends to appreciate in value.  There are some gold enthusiasts who believe that gold is the only true currency so they hoard the precious metal in the expectation that the financial system based on currencies not backed by the material will eventually collapse.  But all the while they are waiting, they are holding an asset that is unproductive, has zero yield and costs money to store and insure.

Warren Buffett isn’t a fan of gold.  Why go to the huge effort of mining gold below ground only to put the finished article below ground in a vault?  There are currently an estimated 187,000 metric tonnes of gold above ground in the entire world, enough to fill 2 Olympic swimming pools and worth $7.8 trillion.  This is enough to buy the 30 companies in the Dow Jones Index including Apple and Microsoft and have an extra $1.2 trillion to buy farmland.   All 30 companies in the Dow put their productive assets to work to generate returns that are compounded.  Five years on, huge profits would be earned, while the gold would just sit there in two swimming pools.

Every day these companies generate prosperity. The theory is that gold will outperform stocks in the event of a financial collapse. Good luck with finding a transparent market for gold bars after financial Armageddon.

Brian Durrant