I don’t think gold is the shiniest metal:
That would be silver, if protected from darkening by avoiding contact with air (or rather: sulphur compounds with which it reacts in the air), or mercury, or an amalgam of both (think: mirrors), or chromium. Gold is just yellow.
Gold doesn’t tarnish. Unlike other shiny metals, it stays shiny no matter what.
Besides, saying silver - another precious metal - is also shiny supports my point. We don’t think gold and silver are pretty because they’re valuable; we think they’re valuable because they’re pretty. We’re just monkeys attracted to shiny objects.
Historically? Sure. Gold was first valued for its utility to make pretty things - jewelry, idols … but once the Egyptians created the shekel out of the stuff its value became less based on how pretty it was than what power possessing it and exchanging it commanded.
Central banks possess foreign exchange reserves, so that they can stabilize the value of their currency or defend its value if it comes under speculative attack. Some countries buy foreign currency to weaken their own currency in order to prop their export sector.
Gold can be thought of as just another foreign currency, one that doesn’t earn any interest. A country might hold it for diversification purposes. The fact that it doesn’t corrode makes it especially convenient, relative to other metals. (Hot take: buy titanium! Also corrosion resistant!)
During the 1990s major central banks got tired of the nonsense and started to reduce their gold reserves. Over the past 10 years, the China/Russia/Iran axis grew hostile to the dollar system (the Iranians had good reason, the 2 other countries less so) and started to add gold to their foreign exchange reserves. They could have shifted to British pounds and Euros, but gold hedges better against sanctions risk.
Gold as a share of foreign reserves remains low though.
Longer answer:
Ratio of Gold to Official Foreign Exchange Reserves Remains Low
More than half of reported gold accumulation since 2009 was from China and Russia, with another quarter coming from a handful of emerging market central banks (Turkey, India, Kazakhstan, Uzbekistan, and Thailand). Lastly, gold retains important shortcomings as an alternative to fiat currencies. It bears no interest and, as a physical asset, is difficult to use in transactions, to say nothing of its high transportation, warehousing, and security costs.
10ish% is low?
Interesting the big drop was right when gold jumped in the ‘70s, after the U.S. dropped the gold standard, the end of Bretton Woods, and the start of free floating currency exchange rates.
Fundamental changes, not major central banks simply tired of the nonsense.
I suspect the further drop in the late ‘80s to early ‘90s reflects electronic exchange platforms making currency trading easier more than anything else.
Anyone know more detail?
Relative to the US dollar and the Euro, yeah low. Other currencies? Not so low. In fact, higher. Recognize though that the advanced countries are operating with a fair amount of institutional inertia. Emerging markets face more active challenges in the foreign exchange market: it’s interesting that that sanctions risk leads them to nonetheless hold some amount of gold.
Yeah, I agree. But during the 1990s I recall reading articles about the draw down, and there was a sense that gold reserves were somewhat anachronistic. Country after country went off the gold standard during the 1930s and never returned. The last holdout was Switzerland who apparently kept it until 1999.
Back to the OP. Strategically investing in gold requires some knowledge of the prospects of opening new mines (supply side), as well as gauging the demand by big and dumb central bank traders, who operate on their own schedule. Also how much and what kind of access typical Chinese and Indian citizens have to financial markets. Dalio has presumably done some of that: now he is talking his book
There have been mentions of the fees associated with buying and selling gold vs stocks. What are typical fees for stocks? Let’s assume small investors. The gold I have sold recently has been at 93% of spot for 14K and 18K. Pure gold trades with less fees usually. And us small metal investors shop around a lot to hit the sales. Many dealers offer to sell limited quantities at spot for your first purchase. Of course if that means mail order there are shipping costs. I only buy face to face. Silver typically sells for spot plus $2 at the moment, so a 6% fee.
Another factor in small metal sales is the rise of Internet forums with their own trading rooms where members can buy and sell from each other for very small fees and have other members reviewing the popular sellers and buyers. Caution this, however, with the need to make sure the gold and silver is real but that is where the reviews help.
It sounds like you are a gold hobbyist. I approve. Hobbies are great, no irony intended.
I couldn’t work out the buy commissions from your example, but let’s generously assume them to be 2%. So round-trip commissions are 7+2=9%, ignoring compounding, time value of money, etc.
For stocks in the US, commissions are zero. For the S&P 500, yearly expenses are 3-5 basis - call it 5. Spreads have declined in stocks from 1/8th of a dollar to lower. Let’s call it 1/8th. Assume the stock is $50 on both the buy and sell (the stock split).
20 years times 5 basis is … 1%. Spread amounts to 0.0025%, so one half basis buy and sell.
So we’re discussing commissions of 9.00% for gold vs. 1.005% for an S&P 500 mutual fund. If you own the stock directly, it would be .0005%. These are round numbers, In practice gold has holding costs as well, even if they are nonmonetary. For example, gold bars are more likely to be lost or stolen or misplaced or lost than brokerage accounts are likely to be embezzled. I’m ignoring these nonmonetary costs and insurance costs, but they may very well exceed the 0.05% per year that I assumed for stocks.
So stocks have much much lower commissions now.
Actually I am a silver holder. Very small time. I buy a few ounces a month as I see cool looking rounds (coin shaped). I keep them in a box for my grandson someday. My wife is the gold bug. She is Thai and they traditionally “wear their wealth.” But her collection is not static. She sells jewelry so she can buy a different piece. Takes apart earrings to make a pendant, etc. etc. Lots of nice coin shops where I live. I visit three of them that I like.
The wife recently sold a Rolex she was gifted 15 years ago and never wore. That was an interesting experience with the dealer having to verify the watch, check for needed service, etc.
According to this article US banks and businesses are retrieving their offshore gold and physically returning it to the US.
"Concerns over potential tariffs under a second Trump administration are driving investors to move their gold stateside. “The goal was to get all the metal stateside,” Phair told Kitco News, noting that banks are trying to minimize risk by ensuring their holdings are within U.S. borders.
This has led to a surge in gold shipments to New York’s COMEX exchange, with inventories up nearly 75% since the U.S. election."