What do you trust more: gold or government money?

What do you trust more: gold or government money? By Adrian Ash.

“The most important thing about money is to maintain its stability,” wrote Bernard Shaw, the one-time Fabian socialist and then fascist/communist fan-boy who would go on to say approving things about Hitler and Stalin as they murdered opponents, civilians, truth and hope in the 1930s.

The aim, Shaw went on 94 years ago in The Intelligent Woman’s Guide to Socialism and Capitalism, was to ensure “that a Pound will buy as much a year hence or 10 years hence or 50 years hence as today, and no more.”

Fifty years sounds like an impossible stretch of time today for any currency to hold its purchasing power. But prior to the outbreak of World War One, the Pound Sterling — founded on silver and then built on gold — had held its domestic value for pretty much 350 years running.

How so?

“With paper money,” Shaw explained to his intelligent women readers, finally granted a vote in British elections under the Equal Franchise Act of 1928, “this stability has to be maintained by the Government. With a gold currency it tends to maintain itself even when the natural supply of gold is increased by discoveries of new deposits, because of the curious fact that the demand for gold in the world is practically infinite.”

Cue Shaw’s punchline:

“You have to choose (as a voter) between trusting to the natural stability of gold and the natural stability of the honesty and intelligence of the members of the Government. And, with due respect for these gentlemen, I advise you, as long as the Capitalist system lasts, to vote for gold.”

Today you might often find this Shavian witticism quoted as a reason to buy gold for investment. …

But around a century ago, voting for gold as money was very nearly a thing which you might have been able to do. Yes, Britain had suspended its almighty Gold Standard when the Great War broke out in 1914, but the post-war Government made returning to gold a priority, and lots of clever gentlemen agreed it should and could be done ASAP. …

Gold has outpaced inflation, real estate, and stocks (though they all move up at around the pace of money manufacture):

Over the last 58 years in fact, since Harold Wilson first took office in October 1964, the gold price in Sterling terms has risen by a little over 8.5% annualized.

That beats annualized inflation (on the old RPI measure) of around 5.7%. Gold also beats UK house prices, the totem of wealth and well-being for pollsters and politicos of pretty much every stripe.

Up around 8.0% annualized on average, bricks and mortar show the kind of positive return for the UK’s legendary hard-working home-owning classes for which any UK Prime Minister would happily take credit. Boosterish if not populist politicians might also like to take credit for a booming stock market too, and over the last 6 decades of 11 prime ministers (4 of them now since mid-2016), the total return from UK-listed shares comes to somewhere just shy of 8.0% annualized, dividends included. …

Gold is so apolitical it is very political nowadays:

Unchanging, unfeeling and utterly inhuman, gold bullion is the very opposite of politically-driven money. No one can control its supply, demand or price (world No.2 consumer market India has repeatedly tried and failed). So while gold as money is now but a distant dream on the wilder shores of economic thinking and op-ed columns, it remains the ultimate two-fingered salute to the fiat currencies which have replaced it worldwide.

Whatever its investment appeal for the individual saver at any given moment, buying gold is always and everywhere a political act, a wilful escape from the managed currencies and all-too human financial systems of post-gold economics. Those two fingers have repeatedly paid off for UK residents wanting to hedge against the ruling politicians of the day.

Here are the investment returns in Australia over the 20 years from 2000 for the main asset classes: