Gold, and what it is actually for
Gold is not an investment, it is insurance against the currency. Judge it as insurance, and it makes far more sense.
Decide whether to hold gold for a reason rather than a mood.
How Gold works, in one picture
The same argument as the text, as a chain. Each step is what makes the next one possible.
The basket is an average, and you are not average
If you rent in a city and drive to work, your personal inflation rate in a year of surging rents and fuel can be double the headline. The number is not lying. It simply is not about you.
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It fails every test of a productive asset, and that is the point
A business produces cash. A bond pays interest. Gold sits there. By the standards of a discounted cash flow it is worth nothing, and Buffett's objection to it is entirely correct on those terms.
- 2
But it is not competing with businesses. It is competing with money
Its function is to be a store of value that no government can print more of. When people doubt that a currency will hold its purchasing power, they reach for the thing whose supply cannot be expanded by decree. That is what a gold rally usually is: a vote against money, not for metal.
This is why gold can rise while inflation is falling. It is not tracking the CPI. It is tracking confidence.
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The real driver is real rates
Gold pays no interest. When you can earn a good return above inflation on cash or bonds, holding it is expensive. When real rates are low or negative, holding it costs you nothing, and it tends to do well. That relationship explains more of gold's behaviour than any headline.
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Size it like insurance
Insurance is not supposed to be your biggest holding, and it is not supposed to make you rich. A small allocation that behaves differently from everything else you own is doing its job. Expecting more from it is a misunderstanding of what it is.
You can explain why gold can rise in a year when inflation falls.
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Gold is not an investment, it is insurance against the currency. Judge it as insurance, and it makes far more sense.
Screens for the UK, the JSE, Japan, India, China and Hong Kong, each with the local risk that actually drives it.