Views: Nirgunan Tiruchelvam: Gold still glitters as the Golden Jubilee looms
Richard Nixon was the only US President to resign. Investors will remember him for another reason. Next month marks the 50th anniversary of the end of the gold standard. On Aug 15, 1971, Nixon closed the gold window. He ended the practice of pegging the US dollar to gold. Before that, the US dollar was fixed at a peg of US$35 per ounce to gold. Other currencies were traded at a fixed price to the US dollar. The US dollar became a free-floating currency, and was measured only by comparing it to other currencies.
In 1974, then-President Gerald Ford allowed Americans to freely trade gold. Gold prices exploded. Between 1974 and 1980, gold prices rose nearly 400%. Inflation skyrocketed to 20% in the US. The world was battered by oil shocks and labour unrest.
A 50th anniversary is known as a golden anniversary. The term is apt for those who have held the yellow metal since August 1971. Gold prices have risen 46 times in 50 years, which is a CAGR of 8%. These returns would have dwarfed investing in US treasury bonds. If you held US 10 treasury bonds in that period, you would have lost 60%.
The case for gold seems even stronger than it was in 1971. Gold is viewed as a hedge against inflation. Its vast outperformance against the dollar over 50 years is testament to that quality.
The risks of inflation seem to have risen with Covid, which has led to massive fiscal and monetary expansion. In 1971, the federal debt was 50% of US GDP. Today, the US dollar is not backed by a hard asset. The federal debt is US$28 trillion ($37.7 trillion), which is 1.3 times US GDP.
President Joe Biden has passed a US$1.9 trillion relief package. This includes economic relief cheques for Americans, which may worsen the fiscal deficit. In 2020, US federal spending was US$6.5 trillion, but only half was collected in taxes.
The monetary expansion has been even faster than the fiscal one. One quarter of the dollars in circulation were printed in the last 18 months.
Gold rally
Investing in gold has strong allure. Holding physical gold is one way of doing so. Investing in gold miners and retailers is a prominent proxy for investing in gold.
The last great gold rally was after the global financial crisis. As inflation fears rose, gold prices rose 166% from December 2008 to May 2011. Some of the jewellery stocks and miners outperformed the precious yellow metal in that period.
Ray Dalio, the founder of Bridgewater, is a gold bull. He is dismissive of the dollar’s prospects and says “cash is trash”. Bridgewater’s filings reveal that SPDR Gold Trust represents an eighth of its holdings. Other gold proxies are miners such as Newmont, Yamana Gold and FreeportMcMoRan. All three of these miners outperformed the gold price during the last bull run.
Investing in the stock jewellery retailers is another route. Singapore and Hong Kong are the centres of the gold trade. But the gold held in the jewellery shops may provide even better returns than investing in physical gold.
Covid has affected foot traffic to jewellery shops. The recent restrictions have rubbed salt into the wounds of this faltering industry.
However, jewellery buyers are returning to shops. The touch and feel of trying out a gold bracelet cannot be replicated by an app.
Covid has hit the industry hard. Out of the 24 jewellery stocks listed in Singapore and Hong Kong, 13 are trading below their book value. Some are trading below the inventory in their stores. The stocks have dropped by an average 20% since Covid.
In Hong Kong, Chong Fai Jewellery Group is trading at 0.9 times its inventory and 0.7 times its book value. The company sells jewellery and pure gold in Kowloon. Its inventory consists of gold, silver and diamonds. The stock has lost almost 90% of its value since the pandemic struck.
TLV Holdings, a Singapore jeweller, is trading at 0.4 times P/B. TLV controls the Taka brand of jewellery. Its market capitalisation of US$39 million is less than its stock of jewellery.
Most investors may not have been around in the summer of 1971. But, it is never too late to join the gold quest. E