There are investments whose value is difficult to determine. Their value is whatever the fool pays for them. They do not pay out dividends and have no coupons, but the buyer hopes there will be a day when someone will want to pay more for them than he or she has paid. Gold is a good example, but the same goes for classic cars, paintings, wine and whiskey. Yet the latter four still have a useful function. With gold, we go to great lengths to extract it from the ground, only to hide it deep in an underground vault.

The fact that its value is determined by what a fool will pay for it also creates a lot of room for swindlers and charlatans. That is a reason to be careful with this type of investment. Hence the saying: a gold mine is a hole in the ground with a liar next to it.

Worth its weight in gold

Gold is often seen as the ultimate safe investment. The problem, however, is that gold does not produce anything. A kilogram of gold is still a kilogram of gold in ten years. In the meantime, it does not yield dividends or interest, only storage and security costs. It is an unproductive investment, as Warren Buffett also argues. He compared gold to agricultural land: for the total value of all the gold in the world, you could also buy 400 million hectares of agricultural land. That land would have produced enormous crops a century later, while gold would have remained unchanged.

Because gold is an unproductive asset, it hardly yields any return above inflation in the long term. Since 1900, for example, gold has yielded an average annual real return of only 0.8% (after inflation), while shares have yielded an average of 6.9% per year in the same period. In that respect, gold is better compared to a currency. Currencies used to be linked to the price of gold. Gold was used as a means of payment for a long time; some see that long history as a sign of value. But then cowrie shells should also have value, as they have been used as a means of payment for even longer than gold.

Value in extreme situations

Gold only has value if people no longer have faith in financial assets. For that to happen, the financial world would have to collapse, for example, due to war. In a war, people would have to pay to cross a border or buy a loaf of bread. There is a chance that regular money would be worth no more than the paper it is printed on, although there are many areas in the world where the dollar always remains valuable as a reserve currency.

The tricky thing in situations where you must cross a border or buy a loaf of bread is that the other party usually has no change. What’s more, carrying around a gold bar is inconvenient. In that respect, it would be better to convert gold into jewellery. That is easier to carry around and may have extra value in bartering.

Gold is a poor hedge against inflation

In the long term, gold may follow inflation, but this may not happen in the short term. For example, gold did not decline during the high inflation earlier this decade. The value of gold is in the long term, and gold may follow inflation, but in the short term, this may not be the case. For example, gold did not fall in value during the high inflation earlier this decade. However, the value of gold is expressed in a particular currency, and those currencies fluctuate. In recent decades, there has been increasing monetary madness, with unconventional policies used to devalue the value of currencies collectively. This has only been partially successful in relation to other currencies, but it has been successful in relation to gold.

Incidentally, Bitcoin — also an asset worth whatever the fool will give for it — performs better than gold in this respect. Moreover, Bitcoin is much more convenient for customs inspections, digital payments and safe storage, although the usual swindlers and charlatans are also active in this area.

Chinese demand determines the price of gold

The recent rise in the value of gold has more to do with the demand for gold than anything else. Lately, buyers have been primarily Chinese: the central bank and then individuals. Like the Russian central bank, the Chinese have been trying to reduce their dependence on the dollar since the Great Financial Crisis. At their peak, the Chinese had 1.3 trillion in treasuries; now, it is only half that amount.

Chinese individuals had invested most of their assets in the real estate market. The real estate crisis has caused this percentage to drop. Moreover, Xi Jinping argues that houses are meant to be lived in, not speculated with. In China, it makes little sense to go against Beijing.

Much of that money went into ordinary savings accounts, and commercial banks in China mainly used it to buy Chinese government bonds. This partly explains the low interest rates in China. In addition, the Chinese remain reluctant to invest in shares (even now that they are trading at less than ten times earnings), making gold an attractive alternative.

Moreover, many Chinese investors are momentum-driven, and a rising gold price is conducive. There is plenty of money there because China’s trade surplus has increased. Furthermore, many Chinese investors are momentum-driven, and a rising gold price is conducive. There is plenty of money there, as China’s trade surplus has risen to around 1 trillion annually. The only question is when the Chinese will start investing their money in productive assets. An increase in the low-valued Chinese stock market could go hand in hand with a drop in the price of gold.