Sapiens rule the world because of stories. As the historian Yuval Harari convincingly sets out in his excellent series of books on the past, present, and future of humanity, stories are the real difference between us and chimpanzees. Stories are the glue that allow millions of strangers to organise and cooperate towards a common goal. Corporations, nations and money are all fictions. They do not exist outside the imagination of human beings. We believe in them, which give the concepts power.
Gold is one of the most powerful stories in finance. Coveted in ancient cultures, it holds little intrinsic value in the modern age. Its industrial uses are limited, and it generates no yield for the holder. And yet, over centuries a story has been woven in which gold acts as the ultimate store of value. The universal reserve currency. This belief has survived innumerate tests.
Isolating the period since 1982, when inflation was tamed, illustrates gold’s characteristics. It is hard to utilise as a buy and hold asset: underperforming US equities 69% the time. Outside of periods of anxiety, the underlying deficiencies of gold’s reality come back to the fore. However when it does perform, it tends to perform in an inverse manner to the equity market. There were 9 instances of material outperformance against equities. The median duration of these phases was 8 months, with a top end of 24 months round the dot-com crash. The average excess return over equities was 25%, during periods of outperformance (see chart below).
In the context of multi asset investing, gold can therefore play an extremely useful role buttressing risk assets within the portfolio in times of stress. We currently observe elevated risks to global growth and a rising risk of unconventional monetary and fiscal policy. Within our multi asset Cerno Select strategy we hold a 10% position in physical gold via Exchange Traded funds.