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Gold: A Modern Investment Framework For An Ancient Asset

Gold: A Modern Investment Framework For An Ancient Asset

Gold no longer serves as an official money in the modern financial system, yet it is still considered an important asset due to its established diversification and store of value properties. But what framework(s) should we use to understand the role that gold should play in investment processes and policies? In Part I of this series, I present one useful framework which implies that gold is significantly ‘under-owned’ and, consequently, undervalued at present.

A Brief History of Gold’s Monetary Role

Most investors are familiar with the ancient use of gold and silver as money, and that gold still provided the monetary base for economies well into the 20th century. Indeed, less than a century ago, in the aftermath of WWI and associated large currency devaluations and hyperinflations in Europe, there were several international conferences held to try and strengthen gold’s role as a source of monetary and economic stability. 75 years ago the famous Bretton-Woods conference was held, formally re-establishing gold’s role at the centre of the international monetary system.

For investors of that time, gold held a central role in investment processes. It was the bedrock collateral of the financial system – the ‘risk-free’ asset – and the benchmark for measuring investment performance. Gold was also an instrument that the central banks of the day could use to help contain financial crises. In the event of a run on deposits or an interbank collateral squeeze, central banks could lend out their reserves (normally at penalty rates of interest) in order to buy time for the system to restructure and reorganise. For example, gold lending was one of the actions taken by JP Morgan to help contain the US Banking Panic of 1907. This provided a model for how the Federal Reserve was subsequently designed to act as a lender of last resort.[1]

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The Golden Revolution, Revisited

The latest edition of The Golden Revolution is available from Amazon here https://www.amazon.com/dp/1535608994

Back in 2012 John Wiley and Sons published my first book, The Golden Revolution, the core thesis of which was that a longer-term consequence of the global financial crisis of 2008 would be the remonetization of gold. This would occur initially at the international level, that is, as a mean to settle accumulated international imbalances in trade and cross-border investment. The book then also explored how this might come about, what the implications were for the price of gold and for the financial markets more generally.

Now, five years later, it is my pleasure to announce the arrival of the new, Revisited edition, containing an entirely new section on the monetary sources of inequality; multiple new chapters on ‘FinTech’, including cryptocurrencies and digital gold; and updating the text throughout for recent developments in international economic and monetary affairs.

This new, Revisited edition will be published by Goldmoney and will also appear as a special series of Goldmoney Insights over the coming months. In this first instalment I introduce the new book while also including the original introduction from the 2012 edition.

INTRODUCTION TO THE REVISITED EDITION

“If we went back on the gold standard and we adhered to the actual structure of the gold standard as it existed prior to 1914, we’d be fine. Remember that the period 1870 to 1913 was one of the most aggressive periods economically that we’ve had in the United States, and that was a golden period of the gold standard. I’m known as a gold bug and everyone laughs at me, but why do central banks own gold now?”

—       Alan Greenspan, June 2016[1]

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Olduvai IV: Courage
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Olduvai II: Exodus
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