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Still A Gold Bull

What is it about gold that drives investors to polar opposite viewpoints? Keynes called it a barbaric relic and thought it ought to be demonetized, while during the Vietnam War, Vietnamese refugees sewed it into their socks so they could transport it without being detected. They sure wouldn’t agree with Keynes, or his modern day disciple Warren Buffet, who thinks gold is useless since it pays no dividends. I have covered my reasons for being a gold bull in this website before.


Is there anything to add? Yes, the case has gotten stronger! According to Deutsche Bank, 89% of all the asset classes in the world were in a bear market in 2018.


Commodities of all kinds are out of favour. Meanwhile, the rate hikes by the Fed have kept King Dollar (as measured by the DXY) strong, but as per Austrian Business Cycle Theory, the rising cost of capital will bankrupt enterprises in the sub-marginal part of the capital structure, companies that only exist because cost of capital is zero or close to it (hello Tesla, WeWork). The rate hikes have already happened. The dollar strength has already caused Emerging Market (EM) blow-ups. A rising dollar puts a cap on how much the rest of the world can inflate, because price inflation and fx rates will quickly spiral out of control. Most of the world’s economies are mercantilist, and they need a weakening dollar in order to inflate booms without creating a crisis.


A strong dollar and a 2%+ yield on treasuries makes owning gold less attractive. But that’s missing the forest for the trees. I don’t own gold expecting to profit from it in the next couple of months.


John Exter’s Inverted Pyramid. Exter, a former member of the Federal Reserve Board and founder of Sri Lanka’s central bank, understood the role gold played in the monetary system.

Gold is the anchor to my portfolio. Some people park their ‘safe’ capital in LIC policies, FDs, money market funds and debt mutual funds, not to mention the good old fashioned method of keeping money in a bank account, or cash under the mattress. I substitute these with gold. The financialisation of the economy and the war on cash being waged by the Indian government makes me not trust the banking system or the rupee. I doubt LIC will even exist by the time I turn 60. Gold is my insurance policy, my safety net, my substitute for the interest bearing instruments people generally regard as ‘safe’ with respect to credit risk. A FD may pay 7% in interest every year, and it might have outperformed gold since I started buying it. But it offers no capital appreciation; in fact, it offers the same risk profile as any other financial instrument, meaning it is subject to the same political risk as stocks or the rupee. By owning gold, I give up on the yield but I also give up on the risk. It wouldn’t take more than one or two terrible mistakes by the Indian government or the RBI to completely annihilate the wealth of people invested in India’s financial system. If this feels like an exaggeration, just look at Venezuela! 8 years ago when Maduro was elected, had you bought a million dollars’ worth of the bolivar, you can currently only get $2.5 for it, and that’s if you manage to find someone dumb enough to actually give you dollars for that worthless currency. For someone who doesn’t trust fiat, what’s actually stunning about this is the timeline – 8 years is all it took for a socialist to destroy a currency! Imagine an openly hostile to business government getting re-elected and ‘experimenting’ with the economy for two whole terms.


With GST and demonetization, plus their activism, RBI and Supreme Court included, India has already signaled that it is not open for business. Every rupee denominated asset in the financial system has value only because there is some capital left in the country. When that base is hollowed out, and it is only a matter of time before it is, there is going to be major pain. I don’t know when it will happen, but as long as this risk keeps mounting, I want my savings to be in the only financial asset which is not simultaneously someone else’s liability, the only asset recognizable the world over as having value. I want to own my insurance policy against catastrophe. I don’t want to be at the mercy of SEBI or IRDA or the RBI, entities who can change the rules on you anytime with the full sanction of the legal system and government.


Yes, I am aware that there is a risk of the Indian government pulling an Executive Order 6102. I am cognizant of that risk, while also of the opinion that that was a different era, when gold was used in commerce, and is not something that would fall from the sky in the present era of paper money (or rather, digital bits for the most part). I feel comfortable bearing that risk, because I think that if they ever tried that stunt, the government would fall. Will small town people who have their entire life savings in gold and silver behave like sheep and hand it all over to the thugs who come knocking? Besides, I like to think I can see it coming. It’ll start small, maybe requiring Aadhar for every gold purchase, no matter the quantity. Maybe there will be a line in the ITR form asking us to declare how many grams of gold we own, or the rupee value of purchases made in the financial year. I don’t want to envision 1984, but if things ever get that bad, well, the entire financial system would be on the verge of collapse anyway. Governments don’t come after gold when things are fine, they will do so only after things turn ugly. All these worries are for another time… not yet, and I am hoping it doesn’t ever happen. To put it simply, in a scenario where the political risk for gold owners is high, financial assets would already be worth zero. This strengthens my rationale for holding gold, this very risk that I am cognizant of.


I need to own gold, at least until these risks diminish or the price appreciates enough to reflect this risk. Gold is right now priced for an economy which is on a permanent path to prosperity, while in reality the bust is already here, but hasn’t yet become apparent. I’m talking about India, not the US. In USD terms, the gold price might trend down because the US stock market still has a bit of steam left. But the Indian economy is past its heyday, and I have exposure to India, so I own gold. If the gold price sank to Rs. 2500 per gram, I would buy more with gusto. I will have no regrets for having bought at higher prices in the past. To reiterate, a bear market in gold in USD terms has nothing to do with my case for owning gold in India. I absolutely need it since I live here. It only affects the amount of gold I want to have in my portfolio.


A wealth advisor I chatted up told me that his company recommends a standard 10% allocation to gold via ETFs. That offers price exposure, but is not the same thing as owning gold. One should own gold, in my humble opinion, and not merely have exposure to the gold price through a derivative instrument owned (is it even there, or has it been leased out?) by a financial entity which says it will redeem on demand. Indian women are smart that way, perhaps smarter than most of my generation which spurns gold but doesn’t think twice before ‘investing’ in LIC Jeevan Anand or a plot of land out in the boondocks.


Gold is money. Gold is freedom. Gold is tail risk management.

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