"Fund managers reconsider their holdings in gold" is a recent headline from TheWealthNet. It cites a report from Standard & Poor's Fund Services, whom one hopes are more accurate in their assessments of managed fund quality than their colleagues in the credit ratings business. High prices for the metal have apparently if not unsurprisingly led some fund managers to reduce their gold holdings. A team at Barings is mentioned for being disappointed that the gold price has been highly correlated to that of other risk assets, as if investment management were somehow an exercise in the choreography of statistical waltzes rather than an exercise involving the defence and growth of capital. Managers at Union Investment are mentioned for having considered investing in gold but having concluded that "the recent rise of the gold price is not backed by solid fundamentals" (what form of universal currency depreciation would incline them to buy?). A team at Legal & General apparently believe that gold price appreciation has been driven primarily by low interest rates and ample liquidity, and that "on some technical indicators it looks overbought" (compared to what? - for more on which, see below).

While we discuss gold fully aware that simply mentioning the stuff catapults us into presumed gold-bug territory, trying to understand what gold represents is not necessarily intuitively obvious. For some it hearkens back to what Keynes called a barbarous relic, a throwback to a financially unsophisticated and therefore stupid age in which nobody knew anything, and the rise into universal use of fiat money had made all other complementary stores of value obsolete. For others it represents jewellery whose price has been temporarily overwhelmed by an outbreak of speculators displaying greater fool theory (are there any who don't?). But to some, gold is "sound money" that, unlike modern fiat currency, is not destined to be perennially depreciated until it is inevitably replaced or, more realistically, rebranded. As the managers of the Edelweiss fund point out, at the time of World War I, a quarter of an ounce of gold was worth £1. Now a quarter of an ounce of gold is worth roughly £200. In terms of gold, the Pound Sterling has undergone a depreciation since that time equivalent to 97.5% of its original value. As they suggest, maybe the question is not whether gold is over- or under-valued, but whether the fiat currency used to measure it is overvalued (or, by extension, whether it really has any real value at all - the question most often and ironically hurled at those seeking refuge in bullion in the first instance). To the so-called Austrian school, fiat currency is not "sound money" but dishonest money, money produced through the violation of property rights; fiat credit 'coined' into being by commercial banks or issued by central banking authorities.

David Fuller's view My latest analysis of gold's price action accompanies the gold report below.