To know where the Mauritian economy is heading, just follow the price of gold. The yellow metal is a beneficiary of recessions and declining economic confidence. It does not matter that the gold market is not discussed in the monetary policy committee meetings so long as the minutes are not read by ordinary citizens interested in hoarding gold. As an alternative to paper currency, gold can act as a check on money printing and government spending, those Keynesian policies.

To John Maynard Keynes, gold was a “barbaric relic” of a primeval economic past. People have discarded that lousy stereotype, buying gold when they seek to insure themselves against economic uncertainty. The demand for gold has two main parts, as jewellery and as investment. While jewellery accounts for the lion’s share, the holdings of bullion Exchange Traded Funds (ETF) – financial products backed with allocated gold bullion, that are bought and sold in the form of shares – serve as a good indicator for sentiment towards the precious metal.

The gold market has lately witnessed a bull run such that gold’s performance ranks as one of the best on record. After hitting an all-time high in August, gold now hovers around USD 1,900 per troy ounce. Goldman Sachs experts expect the price to exceed USD 2,300 next year, and the Bank of America bets on USD 3,000 by 2022.

In Mauritius, investment demand for gold coins or bars has gone up. During the national lockdown, the price of 34.05-gramme gold coins jumped from Rs 76,700 on 20 March to Rs 90,700 on 12 May, and it skyrocketed to Rs 108,315 on 7 August. Tracking the gold spot price, Newgold ETF listed on the Port Louis Stock Exchange posted an annual return of 38.5% as at 5 October 2020. The gold-price rally has run out of steam for the past weeks, but it is likely to gather momentum again as the coronavirus recession hits.

Gold’s main drawback is that it pays neither a dividend like a share, nor a coupon like a bond, nor a rent like property. Gold will never outperform stocks and bonds in the long run because it does not grow or produce a cash flow. The metal loses its allure when the dollar or the interest rate rises.

However, there are many local factors that whet the appetite for gold as a store of value. First, investors will become wary of the soaring quantity of money created by monetary authorities, through the grant of Rs 60 billion to government and the sale of USD 2 billion of official reserves with the rupee proceeds going to the Mauritius Investment Corporation. The size of the Bank of Mauritius’ balance sheet swelled by 36% in the year ended 31 August 2020, standing at 71% of GDP at the end of June 2020 compared to the European Central Bank’s 54% and the US Federal Reserve’s 33%.

Second, the ultra-loose monetary policy has stoked fears for the eventual resurgence of inflation. Gold does not correlate with the inflation rate as such, but with the rate of change of the inflation rate. As the Bank of Mauritius projects headline inflation at 2.5% in December 2020, it will be five times the 0.5% of December 2019.

Third, the current negative real interest rate writes off the opportunity cost of holding gold. The argument that the yellow metal does not pay interest becomes less persuasive when other assets like bonds are also yielding paltry returns. Fear of cheap money, which increases in times of economic turmoil, drives up demand for gold, the more so if investors fret about a real estate market crash.

Fourth, gold can beat stocks as the pandemic worsens the financial results of listed companies. While equity markets are weighed down by concerns about economic growth, spot gold exhibits a negative correlation with the Semdex. To invest in gold is to hedge against risk. As an asset class that correlates weakly with other securities, the old reliable metal is typically a safehaven asset, providing diversification benefits for an investment portfolio.

Fifth, the parlous state of public finances makes one worry about the temptation of a profligate government to debase the money further so as to inflate away its enormous debts. Government’s budget is overstretched with a budget deficit of 13.6% of GDP and a gross public sector debt of 81.7% of GDP as at 30 June 2020. The absence of fiscal rules can bring the country to the brink of ruin and hence constitutes a strong motive for holding gold.

Last but not least, confidence in government and in its fiat currency is dwindling. The collapse of the rupee is perceived as reckless monetary management, and the chaotic government responses to the oil spill and to the black listing of Mauritius have thrown doubt on the competence of the rulers. Buying gold, like demonstrating in the streets, is a way of taking government to task.

Are you adequately protected from government’s failings that could dilute your wealth? How much faith do you have in paper money and in the financial system? The answers to these questions are worth their weight in gold.