The Gold Standard: Precious Lockdown Metal

In 2011, writing to the shareholders of the conglomerate Berkshire Hathaway, its chairman, the legendary investor Warren Buffett, sketched a portrait of how much gold exactly there is in the earth today. The quantity pegged was 170,000 metric tonnes. That might sound like a lot but remember it is the entire storehouse of the metal that has ever been available. Buffett said that if all of it were gathered together and fused, it would make a cube that would be about 68 feet on every side. That means it could fit into a small stadium. All the obsessions of humankind were over this cube. And yet, it has shaped civilisations and takeovers of continents, perhaps the modern age itself, because gold was one of the reasons why European nations began their colonial seafaring ventures. In the year that Buffett was writing, the value of all that gold totalled $9.6 trillion. Today, it is about 12 per cent more.

In the letter, Buffett was arguing why he didn’t think gold made sense as an investment. It didn’t create anything and, without any output, how would one calculate its value? He asked his readers to imagine the cube of total gold as Pile A. Then he compared it to a Pile B of the same value, $9.6 trillion, but made up of other investments, like land or companies. He wrote: ‘For that, we could buy all U.S. cropland (400 million acres with output of about $200 billion annually), plus 16 Exxon Mobils (the world’s most profitable company, one earning more than $40 billion annually). After these purchases, we would have about $1 trillion left over for walking-around money (no sense feeling strapped after this buying binge). Can you imagine an investor with $9.6 trillion selecting pile A over pile B?’ Why then do people buy gold when it does nothing? It is on the assumption that someone else will pay more for it in future. But Buffett was not sold on the idea. ‘A century from now the 400 million acres of farmland will have produced staggering amounts of corn, wheat, cotton, and other crops—and will continue to produce that valuable bounty, whatever the currency may be. Exxon Mobil will probably have delivered trillions of dollars in dividends to its owners and will also hold assets worth many more trillions (and, remember, you get 16 Exxons). The 170,000 tons of gold will be unchanged in size and still incapable of producing anything. You can fondle the cube, but it will not respond,’ he wrote.

And yet, in August this year, when Berkshire Hathaway disclosed new purchases it had made, the investing world was caught by surprise because it included shares of a gold mining company. Buffett had gone against his own advice. The reason was obviously Covid-19 and its economic after-effects. Gold’s value is intimately tied to fear and the world was in absolute fright. Fortune reported: ‘As the coronavirus crisis escalated, the celebrated investor added just a single new stock to his Berkshire Hathaway portfolio: Barrick Gold, a Canada-based mining company whose stock price loosely trades in tandem with the price of gold—which has surged this year (up nearly 30%) as investors have sought safe havens. Barrick itself has outperformed the precious metal, with its shares up 45% so far in 2020. Buffett’s Barrick stock is currently worth about $565 million.’

GOLD is the archetypal symbol of wealth ever since humans became prey to the idea of possession. It is security and safe haven against the uncertainties the world throws up. The Rig Veda, the oldest literature of India, mentions it in hymns. Thousands of years before that, it was treasured in Egypt. It is foremost among the gifts given to please the gods. Gold is why money became money. When kings minted coins first, they were of gold and other precious metals. It is the value of the coin’s substance that decided its worth. Consider now the notes that you have in your purse. It is only paper, an agreed illusion. The only guarantee of its worth is the state. It is because the government promises to pay you Rs 50 that a 50-rupee note is worth that amount. But in a world that does not have governments, or where they fall to the armies of neighbouring countries every second year, such a promise has no meaning. This was as it was for most of human civilisation. The only recourse then for money is a commodity that is convenient to store because it can be easily shaped into coins, is scarce and therefore becomes valuable. Plus, it was aesthetically and psychologically appealing. In precious metals, gold fulfilled all criteria better.

Even after nation-states were born and there was continuity in stable governments, gold remained the measure tied to which countries issued currencies. It is only in the last century that governments turned to currency by fiat. Before that money floating in the country was backed by an equal amount of gold in vaults. It is not so now. Money is now a chimera. When there is a deep economic recession, as happened in 2008, the US government just prints dollars to beat it. And they are doing it now too. Trillions of dollars worth of paper currency just appearing out of nothing. No one really knows what will be its fallout. Gold is real. It may not produce anything as Buffett said, but you cannot add 10,000 tonnes of it on a whim. It is why gold remains hovering as a shadow in macro-economics, the back-up whenever humans feel that the moment of collapse is arriving. When the frail trust by which their earnings are hoarded in modern financial institutions is about to be broken, they go scampering to gold. Every time there is a massive crisis of confidence in society or economy, gold bounces back.

And so it has been with Covid-19.

There have been several pandemics in the last 50 years, from HIV to Swine Flu. Correlations made between the price of gold and these events are not clear. There is, however, one telling difference today. In none of these pandemics has there been a global lockdown of the scale now seen, fertile soil for a mother-of-all recessions. A better connection to how gold behaves is in crises similar in scale, like the 2008 recession. As a Financial Express article said: ‘The financial chaos which was triggered by the collapse of Lehman Brothers in September 2008 led to gold prices jumping from [a] little over $700 per ounce to touch the level of $1900 an ounce by October 2011. During this period of three years, the equity markets around the world were volatile, and investors were heavily relying on gold to preserve their capital. After 2011, the gold price started declining as the stock markets gained stability.’

Something similar began to happen this year once the current pandemic’s dimensions became clear. Gold started inching up and then it became a full-blown spurt in prices. Demand soared in proportion with the panic and the lockdowns that followed one after the other in different countries. At the beginning of the year, 10 grams of gold was priced at Rs 39,000 in India. By the second last week of March, it still hovered at that level. By March-end, soon after the lockdown was announced, it had moved to Rs 43,000. By June-end, it was Rs 53000, a peak level. It is now at Rs 52,000 because there is a handle to the panic. The share market has seen a bounce-back and the economic life of the country has restarted. But what is waiting round the corner is still unknown. The recession could be a long one. Gold will then keep climbing. When everything else is going down, gold remains steady, the anchor against inflation and chaos. Just ask any Indian housewife. You can see it in the inflows of Gold Exchange Traded Funds, mutual funds that buy only gold and whose performance correlates with its price. In India, inflows were 14 times of the same quarter of 2019. A Mint article said: ‘Gold exchange-traded funds (ETFs) saw staggering net inflows of over Rs 2,426 crore in the three months ended September 30, as investors continued to hedge their exposure to riskier assets due to higher economic uncertainty resulting from COVID-19 and US elections. The inflows during the Jul-Sep quarter of the current year were 14 time higher than the inflows during the same quarter last year. Investors had infused Rs 172 crore in this asset class in quarter ended September 2019, shows Association of Mutual Funds in India (Amfi) data.’

INDIA HAS an obsession with gold more than any other country in the world. Its people hold the most of it. Gold is inbuilt into Indian culture. The festive season sees a huge spurt in purchases. During important family occasions like marriages, gold is a necessary feature. For the Indian household, all that gold is not mere ornamentation but also security. To see how fundamentally tied gold is to the Indian psyche, rewind to 1991, when India realised that it had no foreign exchange reserves left and they couldn’t really buy anything from the world unless something drastic was done. The first step was to pawn the gold the country had to tide over the immediate crisis. It was humiliation for a country that believed itself to be proud. But it changed India forever because liberalisation became the only option to get one’s pride back.

What India did then is just as ordinary people do when they need desperate funds—gold ornaments locked in a corner of the house become the credit line. The local moneylender brokers the credit. In recent times, he has been replaced by non-banking financial companies (NBFCs) that give loans against gold. Because of Covid-19, two things happened. First, investments in gold went up but demand for physical gold crashed. As a CNBC report of October said: ‘Gold demand in India fell 30% in the previous quarter, but a sense of “cautious optimism” has returned to the market, according to the World Gold Council. India is one of the largest markets for gold. Jewelry demand in India between July to September fell 48% year-on-year to 52.8 tonnes from around 101.6 tonnes a year earlier, the organization said in a report. But demand for gold as an investment rose 52% to 33.8 tonnes on-year.’ But simultaneously, just how wise Indians are in their gold obsession became apparent when gold loans saw a huge uptick even as people faced problems getting other types of loans. A report by credit rating agency CRISIL said it had doubled. It quoted Krishnan Sitaraman, Senior Director, CRISIL Ratings: “Unlike other asset classes, gold loan has not faced major issues in collection and disbursement, or re-pledge of loans, barring in the stringent lockdown phase in April and May. With many NBFCs facing collection challenges and a likely increase in delinquencies, fresh disbursements, especially to the MSME and unsecured loan segments, have remained low. Consequently, gold-loan financiers are expected to benefit. Preliminary estimates indicate that gold loan disbursements, including re-pledge, at NBFCs have more than doubled sequentially in the second quarter of this fiscal.”

Even temples, strapped for cash owing to the lockdown, were turning to gold. Like the Travancore Devaswom Board which manages temples in Kerala, including the one at Sabarimala, the famous pilgrimage spot. It is planning to convert its gold into money. The Deccan Herald reported: ‘Devaswom Board president N Vasu said that the stock taking of gold and silver was almost over and it would be deposited in RBI bonds after obtaining court’s permission. The interest from the money thus raised would be used for meeting the expenses of the temples. TDB sources said that since the gold received as offering was of different quality and forms, those were being melted and converted to bars for depositing in RBI bonds. The Guruvayur Sri Krishna Temple had earlier deposited gold with RBI.’ Gold remained the eternal back-up even for gods with a cash flow problem.

About The Author

Madhavankutty Pillai

Madhavankutty Pillai has no specialisations whatsoever. He is among the last of the generalists. And also Open chief of bureau, Mumbai  

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