Unhedged Position | Is Gold Asking You To Be Afraid?

Note: 'Unhedged Position' is a weekly column by Nazim Khan, Editor, NDTV Profit Digital. He writes about markets, economy, and technology — and the forces that connect them.

“Power resides where men believe it resides.” It’s a perceptive line from Game of Thrones—a show as much about the politics of power as it is about entertainment.

At the recent NDTV Profit IGNITE conclave, gold was very much a subject of discussion — and some experts with sharp views weighed in on why it continues to enjoy the power it does, and what that means for investors, markets, and even the global economy.

To begin with, veteran investor Ramesh Damani appeared dismissive of the yellow metal, pointing to the muted returns posted by gold over the very long term.

“Over the past 150 years, gold has given subpar returns of about 3% per annum,” Damani said. While he acknowledged the recent outperformance of gold — “if you’re a trader (and you rode the wave), hats off to you” — the investor said he was perfectly fine holding stocks instead.

Damani’s is the classical view of the value investor, who evaluates assets based on their cash flow. Gold has none. Warren Buffett, the doyen of investing, aptly sums up the problem with the yellow metal: “Gold is constantly dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it.”

Why are gold prices so high, and why do we hold it in such high regard? A short recounting of history is in order.

History is full of governments that tried the easy way out — printing money — and paid the price.

The realisation: currencies function best when they have a touch of scarcity. Too much creates an abundance of demand, sending prices soaring.

Gold’s appeal was obvious — scarce, malleable, immune to rust, and irresistibly lustrous. It’s no surprise it served as a medium of exchange for large parts of human history.

However, gold was far from perfect. It was impractical for small transactions, and inflation or deflation often followed new discoveries or shortages. The abolition of the gold standard was partly driven by these flaws — and because of those flaws, the US saw an opportunity to make its currency a global reserve.

Still, the fascination with what we don’t have continues — not least because central banks haven’t exactly covered themselves in glory.

Damani’s view on gold was challenged by his co-panellist, Manish Chokhani of Enam Holdings.

After all, while gold may have a very poor long-term record, it has an excellent long-term record — beating the Sensex over each of the past five, ten, and fifteen-year periods.

Chokhani also pointed out an oft-overlooked facet of investing in gold.

Most Indians wouldn’t know that between 1981 and 1999, gold gave zero returns in US dollar terms — and they didn’t need to.

Because the rupee fell against the dollar during that time, gold became more expensive in India. A play on gold was effectively a hedge against a weakening currency. Or, as Chokhani put it, “The institutional memory that our families have — being in gold and in real estate — is an inflation hedge in India.”

Since the global financial crisis — and especially after the Covid pandemic— western economies have been on a debt binge, with debt-to-GDP ratios crossing 100% for many countries, including the US.

That additional debt flows into the money supply, which in theory triggers inflation, effectively debasing currencies such as the dollar. It’s the market’s way of punishing those who hold the debt. Some say western economies are trying to “print their way out of the debt crisis” by intentionally devaluing their currencies.

So far, barring an odd jitter, bond and currency markets haven’t shown much panic.

But the superb run in gold is telling another story — and after a steady climb for more than a decade, the recent explosion in prices has sparked nervous chatter.

The shorthand is this: gold’s price action suggests that the US dollar could be staring at a credibility crisis — and the smart money is starting to act.

Gold has value not only because it was a store of value in the past, but because enough people believe it still is.

Even Buffett, gold-phobic as ever, recently noted that gold has become a favourite of investors “who fear almost all other assets, especially paper money — of whose value they are rightful to be fearful.”

When central banks start to diversify away from the dollar, gold becomes the logical alternative — since there isn’t another. They are set to net-purchase more than 1,000 tonnes of gold for the fourth straight year. China, Russia, India, and Turkey are among the top buyers.

This isn’t to say the US dollar will collapse next year — or even in the next five or ten years. Should the dollar lose its pre-eminent place at the high table of global finance, where 60% of global trade is denominated in it, that fall may be gradual and painful rather than sudden and spectacular.

What does all this mean for investors?

There’s no telling if gold could rise further from current levels. It very well could — though markets have shown that anything that runs sharp tends to take a breather.

Buffett rightly notes that gold is a “good way of going long on fear, but you have to hope that people will become more afraid [in the future] than they are now.”

Should you then, as the headline of this column asked, be afraid?

The world of the past thirty years — characterised by rising broad-based prosperity, free trade, and open immigration — has suddenly changed character.

And fear isn’t always irrational; sometimes it’s insurance. In that sense, buying gold isn’t about believing in its shine — it’s about admitting the world can still lose its nerve.