Following the yellow brick road: the case for gold

Author: Ben Ashby

In The Wizard of Oz, the yellow brick road is often interpreted as an allegory for the gold standard—a path toward safety and stability amid a world beset by uncertainty. Today, with gold up approximately 75% in the past five years, Keynes’s so-called "barbarous relic" is winning new followers.

A Golden Response to Money Creation

The modern case for gold rests on several structural pillars. First, there is the vast increase in the money supply since the global financial crisis. In the United States alone, M2 has increased from approximately $7.5 trillion in 2008 to over $22 trillion by 2025. That’s a rise of over 190%, compared to gold’s 286% increase over the same period. But it hasn’t been just the United States. The Eurozone saw a similar increase, whilst China’s appears to be a magnitude larger again.

Though central banks have slowed or even stopped quantitative easing in recent years, the liquidity injected remains in the system, contributing to the inflation of asset prices and financial imbalances. US equity markets are near all-time highs, and housing affordability has deteriorated to generational lows. This is the Cantillon Effect in action—new money entering the system benefits financial asset holders long before it reaches workers or consumers, creating inequality and economic distortion.

Fiscal Erosion and Global Imbalances

Second, there is the matter of deteriorating government finances. The US continues to run multi-trillion-dollar annual deficits, while major economies such as Japan, China, and much of Europe face rising debt-to-GDP ratios. Studies like Bank of America’s estimate that every dollar of deficit spending now returns only 58 cents in GDP. This reflects declining marginal returns on government expenditure and signals potential stagflation.

Trust and Geopolitics

Third, the seizure of Russian central bank reserves in 2022 has profoundly reshaped perceptions of reserve security. In response, central banks around the world have ramped up gold purchases. According to the World Gold Council, they have added more than 7,800 tonnes since 2010, including over 2,000 tonnes in the last three years alone. The People’s Bank of China has led the charge, diversifying aggressively away from the dollar.

In fact, gold has now overtaken the euro to become the second-largest reserve asset globally, comprising about 20% of central bank reserves, compared to the euro’s 16% and the dollar’s 46%.

Financial Repression and Paper Losses

Yet gold remains under siege in developed markets. Basel III rules give sovereign bonds and other even more dubious state-linked issuers more favourable treatment than gold, and European regulations still favour even junk-rated sovereign debt over the metal. This is not coincidental, but reflects a systemic tilt towards financial repression.

As a result, the concept of "money in the bank" is losing meaning. As legendary gold investor Julian Baring noted, it is often better to price currencies in gold, not the other way around. Since 1971, the US dollar has lost nearly 98.8% of its value against gold, and the British pound over 99.3%.

Gold Stocks: Risk and Opportunity

While physical gold has soared approximately 72% in the past five years, gold miners themselves have lagged, with the FTSE Gold Mines Index rising approximately 39% over the same period.

Though the divergence between metal and mining stocks themselves has drastically narrowed this year, mining stocks continue to trade at subdued valuations compared to the metal itself. On a price-to-NAV basis, many gold miners are near their most attractive prices in decades.

Take the L&G Gold Mining ETF as a proxy. Under a range of scenarios—from a modest inflationary regime to a repeat of the 1970s-style monetary disorder—the fund could easily double from its current level of £54.50 (at time of writing, 26^th August 2025). In more extreme cases, such as a re-run of a 1970s-style economic environment of monetary mayhem driving both higher gold prices and sterling weakness, the ETF could plausibly exceed £400 in a blow-off top, though these may prove fleeting.

Of course, this sector is not without peril—it is capital-intensive, exposed to operational and political risks, and occasionally marred by excessive speculation or even fraud. As Mark Twain quipped, “A gold mine is a hole in the ground with a liar standing on top.”

Diversification is Key

Hence, a portfolio approach is warranted. Blend established majors with selective juniors offering option-like returns. While ETFs can help, junior miner ETFs tend to include a lot of weak assets alongside potential winners.

Like Dorothy, the journey along the yellow brick road is perilous. Gold's appeal may yet prove illusory. But with sovereign debt selling off even amid rate cuts and growing questions about Central Bank independence in the face of the demands of profligate governments, it is clear that we are no longer in Kansas anymore.