Gold as a consumer durable is one large part of the demand for the metal. But gold as a store of wealth and as a form of money is something which is definitely in the public domain … perhaps it should be more than it is.

One of the issues that something like this brings up is that it might be possible to stabilise currencies if we had gold as a formal part of the special drawing rights (SDR), which the IMF is willing to supply to people. Right now the SDR only considers the major currencies of the world — dollar, sterling, euro and yen — but if you were to add gold to it, that would actually stabilise and reduce volatility in the SDR that it is in right now.

The dollar has been very strong lately — it was weak four years ago. What we could then do is ask that gold be monetised at the international level as part of the SDR.

As a store of wealth, it turns out that gold and inflation are negatively correlated. If that is the case, then in a world of deflation, people will be more willing to hold gold even as a store of wealth because the fact that on gold your yield is zero. But this is no longer a barrier because a lot of nominal assets are earning a negative yield.

We’ve just seen that Switzerland was able to borrow at a negative rate on their bonds. Extremely low yields are going to be the story of the near future. It is part of the secular stagnation that yields will be low.

But if inflation is negative, then you’re getting a real positive rate of return. So it may be that the secular stagnation story is going to be helpful to gold and bring it in more actively as a store of wealth compared to currencies. This will be more so if we say that SDR should contain a bit of gold.

Some central banks are taking to holding more gold than they used to — clearly that has been the case in India and China. And gold had gone out of fashion in the 1990s as a reserve asset in the developed economies, but it is coming back.

Could I be wrong? Could it be that the idea of secular stagnation is not actually as likely as we think? There has been a debate going on in America in the Financial Times recently between Ben Bernanke and Larry Summers. Bernanke is saying the world has not changed — it is the same as it used to be before and eventually monetary action will revive the economy and will go on having growth at the 2.5 -3 per cent that we have had.

The problem is that demographics are very bad in most developed countries. America accepts that the demographics are very, very bad. Secondly, so far there is no surge of innovations that could raise the productive capacity of the global economy.

Twitter and Facebook are not actually enhancing productivity of anybody. They may be very profitable, but that clutch of innovations, which came in the early 21st century has in a sense, valorised leisure activities.

What we used to be able to do without paying for it now has become possible to be sold as a commercial asset and advertised, and various people get onto Twitter, Facebook and the internet. But these are not actually productivity enhancing inventions. And productivity growth has become a problem across developed economies.

Either suddenly from nowhere, a new set of inventions will come on the scene like they always have every 50 years or so or they will come even sooner. If they come every 50 years or so, the last thing we had was the dotcom boom, we may have to wait for 20 years. But if I’m wrong, they may be round the corner.

That would be the only way in which we would not be in secular stagnation. I would put my bet more on the likelihood of a low-yield, low-inflation, low-growth decade or two for the global economy before we get out of it.


This is part of a speech Lord Desai delivered at the recent Dubai Precious Metals Conference at the Dubai Multi Commodities Centre.