How I Learned To Love Gold

– by Alasdair McKinnon, Manager of the Scottish Investment Trust

Gold has fascinated humanity for thousands of years but, to many, its investment appeal remains a source of mystery. I should know, as gold used to baffle me too. After all, surely this era of internet banking and contactless payments renders the use for the yellow metal redundant?

I began my investment career in 1998 and, shortly afterwards, my then boss, who was approaching retirement, passed me some tired-looking articles and press clippings about gold. He explained I might find them useful one day, as in markets, there is nothing new under the sun. At the time, I thought it was an eccentric thing to do and, after the most cursory of glances, I dealt with these documents by placing them at the bottom of my filing cabinet (it would have caused offence to have thrown them in the bin). Gold had been in a bear market for almost 20 years and I failed to see the allure. I was far from alone. Not long afterwards, the then Chancellor of the Exchequer, Gordon Brown, advised by the cream of the economics profession, infamously decided to sell a large chunk of the UK’s gold reserves at a price that marked a generational low.

And there this story might have ended but for an encounter in 2002 with a pre-Parliamentarian Jacob Rees-Mogg, whose employer was invested in South African gold miners. These miners had acted as a safe haven during the post dot-com bubble stockmarket crash and this planted the seed in my mind that gold still had some sort of useful purpose in the modern age.

However, by 2004, I was convinced I was missing something. The price of gold continued to increase, even as the stockmarket rallied. I retrieved those old articles and scoured widely for information. After a while, I realised that much of what I had been taught about money and economics was wrong. A monetary system, no matter how logical, cannot operate without sufficient consent. Gold is our most enduring currency because it cannot be created out of thin air and, today, acts as a barometer for the degree of confidence in our monetary system. Back in 2004, the performance of gold reflected the debt-fuelled expansion of the monetary base driven by an out of control banking system which, ultimately, was judged too important to be allowed to fail.

Today, we are more than 10 years into a monetary experiment that ‘saved the system’ but is losing popular consent. Cheap money has driven asset prices but has increased wealth inequality, especially between generations. Demographics dictate that, in the not too distant future, those without assets are likely to be running the institutions and making the rules. In the interim, a new breed of politician is prepared to rip-up the economic rule book in their quest for power. This shift won’t necessarily prove a bad thing but, regardless, it seems a favourable environment for gold.

Please remember that past performance may not be repeated and is not a guide for future performance. The value of shares and the income from them can go down as well as up as a result of market and currency fluctuations. You may not get back the amount you invest.

The Scottish Investment Trust PLC has a long-term policy of borrowing money to invest in equities in the expectation that this will improve returns for shareholders. However, should markets fall these borrowings would magnify any losses on these investments. This may mean you get back nothing at all.