Why Is Gold Ownership So Low?
The comments below are an edited and abridged synopsis of an article by Charlie Erith
Why is gold so widely ignored when it’s done such a fine job of protecting wealth over a long period of time? Indeed, since 2009, central banks have been adding gold at an average of 1.4% per annum, a fraction lower than the average rate of supply increase of around 2.2%.
There are two major culprits in Erith’s view: The investment industry and Warren Buffett.
The investment industry covers both the fund management industry and the investment banks that serve them. They have an iron lock on the world’s savings. Neither have any incentive to promote gold ownership. An asset that sits in a vault is of no interest to that industry. There is little money to be made from gold by the people who set the investment agenda.
This is where Warren Buffett comes in. The world’s most celebrated investor has an aversion to gold. He says that, unlike equities, gold is an unproductive asset. His comments are generally derogatory. The sense is that gold is something that you are all in on, or believe is absurd. There is little room in the world of traditional asset allocation for some sort of middle ground.
Buffett provides no insight into gold’s intrinsic value as a store of worth. He says that it doesn’t pay dividends or generate a return on capital. But it also doesn’t have profit warnings, rights issues, lawsuits, new competition, patent cliffs, asset write-downs, leverage, liquidity mismatches, management scandals or fraud. It is an uncopiable metal that quietly ticks higher over long stretches of time as governments debase currencies. It is no one else’s liability, and if you own some, it is very unlikely to surprise you.
Central banks understand this. For the rest of the world’s investors, gold ownership as part of a long-term savings strategy remains unconventional, despite its long and illustrious track record. This has particularly been the case during eras of high inflation and political unrest, such as we face now.
Gold should be a core part of a properly diversified portfolio. But you can be sure of one thing: An industry that is incentivised to ignore it will be in no hurry to tell you so.