Is investing in gold like investing in a Ponzi scheme? And what about silver?

Gold investing is in vogue, and it is not hard to see why, but is investing in gold akin to investing in a Ponzi scheme? And what about silver?

Article updated: 21 August 2020 9:00am Author: Michael Baxter

Gold! As Spandau Ballot once said: “you’re indestructible.” But for investors, is gold indestructible? I can’t get rid of this nagging feeling that gold investing is akin to investing in a Ponzi scheme. Silver investing, on the other hand, could be different.

Three wise men

Warren Buffett once said of gold that it “gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility.”

Then again, gold cynic Buffett has just bought into gold miner Barrick Gold. When the Sage of Omaha buys into the gold bandwagon, maybe it is time for gold cynics to take note.

George Soros once called gold “the ultimate bubble.” He later went further and said that this means “it may go higher. But it’s certainly not safe, and it’s not going to last forever.”

Well, gold has most certainly gone higher — it has more than doubled since the 2015 nadir. But of course, the gold price also surged before and after the 2008 crash, increasing roughly seven-gold in the decade before last. But after peaking in 2011, it then lost almost half of its value. Soros’s description of gold as an asset that goes up but then down certainly proved apt then.

The economist Keynes didn’t, contrary to popular mythology, call gold a barbarous relic, rather he described the gold standard in those terms. But in a way, the Keynes quote is the more apt, because I think that Keynes understood something that gold bugs don’t get.

Investing in gold: why do it?

There are three reasons for investing in gold — at least there are three that justifies the recent surges in the gold price. They are:

That recent monetary stimulus from central banks will lead to runaway inflation.
That the dollar is on its way out and gold represents a hedge against the US currency.
We are all going to hell in a handbasket, and gold is the ultimate safe-haven asset.

Let me deal with the second and third points first. If they are correct, why has the S&P 500 just hit an all-time intra-day high? 

Ironically, I think the biggest risk to the global economy and thus justification for investing in gold, is the very reason bulls cite for their enthusiasm. I am sorry for bringing politics into this, but the markets love Trump, while I happen to think the potential re-election of Trump in 2020 poses the greatest risk to the human race seen since the Cuban missile crisis. When the markets surge because opinion polls favour Trump, I see evidence that the markets have lost the plot.

So actually, given the threats to democracy and the potential rise in fascism, I can see why the gold price is up. But I don’t think gold investors share my views on the consequences of Trump, maybe I am wrong.

The inflation argument is quite different and takes me back to Keynes. His detractors think they have empirical proof, Keynes’s theories were wrong because from the mid-1970s, Keynesian economics backfired. But this view is built on a misunderstanding. Keynes emphasised the role of demand in the economy. His approach to the economy was about stimulating demand. He hated the gold standard, as he thought this held back demand. 30-years after he died, in the mid-1970s, lack of demand was no longer a problem, which is why his approach to managing the economy didn’t work.

See: The chart that suggests the surge in the gold price is built on a myth.

But over the last 20-years or longer, demand has been an issue again. Weak growth in wages has meant that policymakers have tried to stimulate the economy by getting borrowing going — and this leads to bubbles.

The latest round of quantitative easing is yet more of the same — it is saying ‘let’s stimulate the economy by getting asset prices up, and that will support banks and confidence so that borrowing will rise and voila, the economy will boom.’

I am doubtful that these problems will be fixed. Demand will remain weak, which is why I think excess inflation is unlikely.

If, on the other hand, we see a continuation of the reversal of globalisation, then that is different. That does worry me, and in that context, I have some sympathy with the buy gold narrative.

What about investing in silver?

Silver is different, and it is different as it has an application in a technology that is becoming a lynchpin of the economy. Silver is an important component in solar panels. Indeed, ten per cent of global demand for silver comes from the solar industry. So that’s why I like silver. But even in that respect, I have a doubt. I also read that the solar industry, as it becomes more efficient, is using less silver.

But then again, silver may also have applications in energy storage

What I can say about silver is that it is no Ponzi scheme. Gold, on the other hand, does have a Ponzi feel about it.

These views are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees

Michael Baxter portrait photo
Michael Baxter

Economics Commentator

Michael is an economics, investment and technology writer, known for his entertaining style. He has previously been a full-time investor, founder of a technology company which was floated on the NASDAQ, and a director of a PR company specialising in IT.

See what else we have to say