Many people laugh at those who love holding gold. It earns no income, it has little industrial utility and it is largely based on scarcity. The last reason is where it gains its popularity. This makes sense as it used to be used as currency, essentially until Britain decided it didn’t need to shore up its gold accounts in 1914 and then later when Nixon hopped off the standard. As James Grant points out in Money of the Mind, unlike today’s quasi-political Fed, “The consequence of a vote of no confidence was an outflow of gold. There was nothing political in this challenge to the financial integrity of the loser, and the certain response was also apolitical; interest rates were raised and the money supply was reduced.”
Today that is not the case. With open market operations, quantitative easing, operation twist and the like, this is a very different world. So what happens when faith is lost in this newer system? As Jesse Felder points out, below is how gold performs in a crisis.
As you can see, it does quite well in times of stress. Holding it as a core may be where the grain of truth in the gold bug lore hides, but once in a while, they seem to be right.
Sources: WSJ Daily Shot; Jesse Felder, Money of the Mind