Gold Is Down. So What? Why I’m Still Buying Gold and Silver

The financial journalists are getting excited again. Gold is down. Silver is down by even more. Every newspaper seems to have discovered an economist willing to explain why this is the beginning of the end for precious metals, and every economist has produced the same list of causes. The Federal Reserve has become more hawkish. The dollar has strengthened. Real interest rates have risen. The Middle East has become a little quieter. Oil has fallen. Inflation expectations have eased. Leveraged investors have been forced to liquidate positions after exchanges increased margin requirements. Every one of these explanations is true, and every one of them misses the point.

I have never understood why people who buy gold insist on behaving as though they were buying shares in a technology company. They watch the price every afternoon and become either euphoric or depressed according to whether the screen happens to be green or red. That seems to me an odd way of treating an asset purchased precisely because you have ceased trusting the financial system. I own gold and silver because I have no confidence in the ability of governments to preserve the purchasing power of their currencies. Nothing that has happened during the recent correction has persuaded me that this judgement was mistaken. Indeed, if anything, I wish I had more money to commit while prices are low.

The present decline strikes me as little more than a transfer of metal from impatient owners to patient ones. During the great rise of the past few years, many people bought precious metals because they saw the line on the chart pointing upwards. They borrowed money to increase their positions, assuming that prices would continue rising indefinitely. Then the exchanges raised margin requirements, and those same investors discovered that conviction purchased with borrowed money evaporates remarkably quickly. Forced selling followed. The newspapers naturally reported this as evidence that the bull market had ended. I regard it instead as the routine clearing away of speculation that accompanies every substantial advance. Markets become healthier when weak holders are replaced by strong ones. Nothing fundamental has changed except the identity of those holding the metal.

Indeed, the behaviour of those investors who matter most suggests indifference to the correction. Central banks continue buying gold in extraordinary quantities. Asian governments continue constructing alternative clearing systems independent of London and New York. China continues importing bullion on a scale that would have seemed astonishing only a few years ago. None of these institutions appears remotely interested in whether gold has fallen ten or fifteen per cent from a recent high. They are buying for reasons that extend decades into the future, not because they expect next week’s chart to be favourable. When the people moving thousands of tonnes remain entirely calm while retail investors panic over temporary fluctuations, I know whose judgement I trust.

What irritates me most about the financial commentary is not that it is inaccurate, but that it mistakes secondary causes for primary ones. Of course interest rates matter. Of course geopolitical crises matter. Of course exchange rates matter. These things explain why gold rises rapidly in one month and falls in another. They do not explain why it has been climbing relentlessly over the longer term. The fundamental reason lies elsewhere, and it is one that commentators seem determined never to discuss directly.

Gold is not becoming intrinsically more valuable. Rather, the currencies against which it is measured are becoming intrinsically less valuable. The distinction matters because it changes the whole nature of the discussion. Gold has appreciated against many other commodities during recent years, and eventually it may cease doing so. Commodity markets always find a new equilibrium. There is no reason why gold should continue indefinitely outperforming copper, wheat, oil or iron ore. Relative prices change continually as technology, production and consumption alter. But that is not the comparison that interests me. The comparison that interests me is between gold and fiat money, because fiat money is not governed by ordinary economic considerations, but by politics.

The political reality throughout the Western world is simple. Governments have accumulated debts that cannot honestly be repaid. They have promised pensions that cannot be funded, welfare systems that cannot be sustained, and bureaucracies that cannot be dismissed without provoking revolt. Raising taxes further risks economic stagnation. Cutting expenditure risks electoral defeat. Open default risks financial panic. Inflation therefore becomes the obvious solution. Instead of admitting bankruptcy, governments reduce the purchasing power of the currency in which their debts are denominated. Creditors are repaid in full, but only in money worth substantially less than when it was borrowed. This allows politicians to pretend that every obligation has been honoured while ensuring that savers bear the cost.

This is why I disagree with those who describe inflation as an unfortunate consequence of excessive public spending. That description belonged to an earlier age. Inflation has now become a deliberate instrument of government. It is no longer an accident of policy. It is policy itself. Debasement is the chosen method by which states intend to escape liabilities they have neither the courage to repudiate nor the discipline to repay honestly. Once you understand this, the long-term case for precious metals becomes straightforward. Gold may eventually stop appreciating against other commodities because markets tend towards equilibrium. It is much harder to imagine gold stabilising permanently against currencies whose issuers have every incentive to continue reducing their purchasing power year after year.

For this reason, I have regarded the recent correction with indifference. My holdings have declined on paper, just as everyone else’s have. That is of no consequence unless I intended to sell, and I have no such intention. If anything, I will repeat, I regret not buying more before this latest advance began. The correction has not altered the arithmetic of sovereign debt or the impossibility of balancing modern welfare states without either default or inflation. Those realities remain as they were before the price fell, and they will remain after the financial journalists have moved on to their next fashionable panic.

One day, governments may rediscover fiscal honesty. Central banks may once again concern themselves primarily with preserving the value of money rather than financing impossible states. When that day comes, I will reconsider my enthusiasm for gold and silver. Until then, every correction simply offers another opportunity to exchange paper promises for assets that politicians cannot manufacture with a few keystrokes. I have every expectation that, once the latest bout of optimism about fiat currencies evaporates—as it always does—the precious metals will recover, and those who sold in panic will once again discover that the market has transferred wealth from the impatient to the patient.