The Reluctant Giant…origins of US investor fears of owning physical gold

Consider the facts:  $18.5 trillion in GDP in 2017.  Largest economy in the history of the world, at least for a few more years over #2 China.  Peerless record of innovation in multiple key industries over the last two centuries.  Center of world military power, higher education, media, and finance.  Third largest population, after China and India.   Fourth largest land mass after Russia, Canada and China.  Second largest trading nation, behind China.   Largest holder of gold as a currency reserve with 8133 tonnes vaulted, worth over $40.4 million for each metric tonne, or a total value of over $320 billion.  (That’s as much as the German, Italian, and French gold reserves combined.)

One would think that investors and institutions within such an extraordinary superpower would have no trepidation about owning physical gold, the enduring symbol of wealth and permanence throughout the ages.  The USA must surely dominate world consumer demand for gold, say the true believers in the American Dream.  Remarkably, although gold demand in the US was 45.8 tonnes on average over the third quarters from 2012-2016, a substantial amount for sure, that figure pales in comparison to the average quarterly demand in India at 209.8 tonnes and China at a colossal 252.2 tonnes.  The world total demand averages 1120 tonnes per quarter, so the US share of that is a relatively small 4%, while almost half the world’s gold flows into China and India.  The figures are also skewed when only the investment demand for gold coins and bars is considered, with America accounting for 10% of the 250 tonnes for investment gold going to that purpose each quarter of a typical year.  America’s thirst for gold is merely trivial for a hegemonic geopolitical superpower that produces one fifth of total global GDP, commands half the military expenditures on the planet, and owns by the largest stock of physical and financial wealth of any country.   So why the odd disconnect?  Seven reasons are worth consideration:

1. The Absence of a Timeless Culture of Gold:  The yellow metal has a storied presence and rich tradition that pervade Asia and the Middle East.  Yes, the US in its relatively short history has experienced gold booms in California and the Klondike, and of course the country was officially on the gold standard from 1882 to 1933.  However, unlike India, China, Iran and Turkey and other Old World cultures, the USA as the brash new kid on the block never experienced millennia where gold served as desirable jewelry, a trusted medium of exchange, an enduring store of value, a treasured cornerstone of each bride’s dowry, and as widespread architectural ornamentation on great palaces and houses of worship.  American families rarely bury gold in their basements or bestow  dazzling gold bars at weddings.  Private citizens were prohibited from holding monetary gold from 1933-75, recent enough to leave a lingering impression among the investor class.  Gold is rarely thought of as money by most Americans, nor does it assume a key place in everyday life.  They are less familiar with it, for it is exotic and beyond their reach, so when someone like John Austin Stevens, writing to the New York Times in 1873 referred to it as a “relic of barbarism to be tabooed by all civilized nations” and when JM Keynes famously picked up on that theme in 1924 to denigrate gold as a “barbarous relic”, there was minimal hue and cry to defend its many virtues.

2. Nightmares of another Great Confiscation: Fear is a powerful motivator, even when the origin of that strong emotion stems from events fading into the distant past.  Among the deepest fears of all is the loss of accumulated wealth after decades of investment, along with the dashing of all the possibilities and freedom one has worked, saved and hoped for.  There is always the haunting concern that the destruction of physical or capital assets could be due to force majeure events beyond the control of ordinary humans:  Raging regional or global warfare, acts of nuclear or biological terrorism, earthquakes destroying a major city, devastating hurricanes such as Katrina or Sandy, hundred-year floods, colossal tsunamis, meteoric impacts, and other calamities torment the imagination.  Short of utter catastrophe, at least there are effective strategies to minimize the risk of loss in destructive events of reasonable scale, including geographic diversification of assets and vaulting of precious metals on private property, well away from high-risk zones.  In such cases the investor feels some modicum of control, however illusory it might be.  An even more paralyzing fear stems from the thought that an investor’s own country would resort to confiscation of assets.  Precedents abound from across the world over the last hundred years.  However, the most infamous example that frightens modern American investors came early in President Franklin Roosevelt’s first term in April of 1933 when he struggled with a policy response to the downward spiral into the Great Depression and the concomitant collapse of the banking system.  Based on power granted under the Act of Oct. 6, 1917, Roosevelt ordered the confiscation of the privately held gold, paying $30.67 per ounce to the rightful owners who were coerced to sell.  After the gold was collected, the dollar was devalued and the gold price was fixed at $35 per ounce.  This chilling episode, whether or not justified  by the horrific collapse of the economy from 1929-33 and beyond, still stalks the collective societal memory of that era, even though a dwindling few who witnessed it remain among the living.  Hence, there are many investors who still view the federal government with skepticism when it comes to honoring the private contracts of ownership of gold.  For some it means avoidance of precious metals entirely as an asset class.  Obviously, such long-resounding echoes of olden times retreat very slowly into the canyons of history. 

3. Games People and Governments Play: The seemingly deliberate timing of gold sales and purchases by major players such as central banks that trigger rapid adjustments in the price of gold surely must strain the credulity of investors.  And well-documented concerns about fractional gold reserve practices, the leasing of unallocated gold that is supposedly vaulted and inviolate, and the appearance of manipulation of prices have caused many Americans and Europeans to be distrustful of the supposedly free workings of supply and demand in the physical gold market.  When the volatility of price movements increases, gold loses some of its luster as investors begin to doubt its liquidity and price predictability in the face of bold actions by elements within the system who would like to see the price of gold held in check.

4. Diamonds are forever…but often not a girl’s best friend…however, the wedding ring is just a little band of gold.  So there’s a plethora of diamond earrings, necklaces, bracelets, etc.  Yet gold chains in America are too often associated with tacky plated bling and conspicuous consumption fueled by mid-life crises or plain old bad taste.  Unlike in India, where the wedding season is accompanied by a substantial annual spike in gold demand, gold bars or coins or jewelry do not form the bulk of the dowry or wedding gifts at American nuptial events.  Only the rare fiftieth or “Golden Anniversary” calls forth a surge in the gifting of gold.  Gifts to newborns are also much more likely to be practical items for parenting or currency in an envelope than chunks of precious metal.  The typical newlyweds in America have only the gold that might be found in matching bands, while the value of the diamonds in the engagement ring is apt to be far greater.  Although this seems like a minor point, the minimal exposure to gold among young people reinforces the weakness of the culture of gold in the US.

5. The Golden Carnival:  The taint of blaring sales pitches and high markups bellowed so frequently on cable TV channels and observed at many cheesy strip malls has given physical gold a rather tawdry image on the retail level.  Although hundreds of reputable upscale dealers exist, the public face of the domestic market for precious metals is often more brassy than classy.  This can turn off the potential institutional or high net worth investor as well, who then turn to staid and respectable stocks, bonds, and alternative asset classes that are more paper-based than physical in nature.

6. Clunky Gold Products:  Insufficient ways exist to buy, store, ship or insure pure gold in just the right amount.  The securitized convenience of ETFs such as GLD from State Street and IAU from Blackrock provide handy, liquid ways to track the price of gold and add gold to the portfolio of assets.  But they are difficult to redeem and are certainly not the same as physical gold.  Redemption is highly restricted to the very largest holders of this so-called “paper gold”, so those who want the real thing are at a loss to find accessible solutions to satisfy their desire for diversification or for an invulnerable personal reserve of wealth.    

7. The Speculator’s Mind:  The vaunted impatience of the West contrasts with the much longer time horizons of the East.  For many American investors, gold is shunned unless it is in a bull market such as the sustained run-up of prices from 2001 to 2012, when gold values galloped ahead at an average annual rate of 17%.  But in ordinary times at stable prices, physical gold yields neither interest nor dividends and there are some real costs of secure vaulting, insurance, transactions and delivery.  Therefore it is understandable that many investors will choose to remain far away from gold, preferring to use the US dollar and T-bills instead as the fundamental bedrock of liquidity in their portfolios.

The seven origins of American reluctance may explain most of the hesitancy about investing in physical gold.  Investors must respect the wide spectrum of views on the role of precious metals in a well-balanced portfolio.  They may not be able to put a dent in the first four factors enumerated above, for they are ingrained deeply in the social history and cultural milieu.  However, with proper education, transparent and straightforward marketing, ownership solutions that ease the addition of gold as an asset class with convenience and liquidity, and an approach that avoids the traps of the speculative approach to investment, investors can mitigate the influence of the last three elements that discourage Americans from owning physical gold.  An appealing platform for automated ownership and advanced standards is analogous to what SWIFT achieved for global cash management.  With emphasis on custom views and optimal diversification in the asset allocation process, the use of gold-backed currency solutions, and the secure ownership of vaulted gold bullion worldwide, the skeptical or unaware attitudes toward physical gold ownership are being transformed slowly within America, the Reluctant Giant.    

Roy Van Til, Ph.D.

Vienna, ME 04360

royvantil@mac.com

207 500-9604