Ever since gold was first used as currency 5,000 years ago, it has remained the most recognisable symbol and store of wealth. Today, the rarity of gold, its universal appeal as a safe haven, and its ever-increasing demand by investors and central banks alike have made it a prudent inclusion in every investment portfolio.
Considering the current global economic and political climate, is gold still a good investment option?
Any individual worried about his/her financial security might ask, should I own gold as an investment?
In this chapter we look at gold from 3 distinct angles and ask…
- What would motivate you to buy or invest in gold?
- What are the characteristics of gold that make it a good investment or hedge?
- What are the current warning signs that suggest that gold might be poised to significantly increase in value?
What would motivate you to buy or invest in gold?
There are 4 distinct reasons that you should own gold as part of your part of your portfolio. They are…
- As an Investment: When you invest in any asset, you expect a return on that investment. When it comes to gold, the figures speak for themselves; its price has risen on average, 8% per year over the last 15 years. More importantly, your gold investment will not only deliver high returns in the long term but can also appreciate in value significantly during times of economic uncertainty.
- As a Hedge Against Uncertainty: Gold tends to have a negative correlation with other assets; it tends to gain when stocks, property, and other investments fall in value. The value of gold is also intrinsic and not pegged to other assets, which makes it a safe haven during times of crisis. Buying gold protects your hard-earned wealth by acting as a hedge against uncertainty.
- As a Hedge Against Specific Risks, Such as:
- Inflation: Inflation weakens currencies and lowers the value of all paper-denominated assets such as stocks, bonds and bank deposits. On the other hand, the price of gold, due to its finite nature, tends to rise when currencies weakens, so adding gold to your portfolio prevents the erosion of wealth through inflation. This makes gold your first and foremost financial insurance for all your other investments.
- Currency Collapse: Incidences of hyper-inflation can lead to the collapse in a national currency, as has been seen in recent times. With its inherent value and appeal as a safe haven, prudent investors holding gold when their domestic currencies become worthless will protect their wealth.
- As Genuine Diversification for Your Portfolio: Due to its tendency to be negatively correlated with other assets, gold provides real diversification to your portfolio. In times of war, natural disasters, economic and political upheavals, a diversification into gold helps smooth portfolio returns over the long term since it reduces the overall volatility of a portfolio and at the same time improves returns.
What are the characteristics of gold that make it a good investment or hedge?
Why Gold Is a Good Investment…
Gold, unlike no other asset, represents the ultimate achievement of material wealth and financial success. Physical gold has also protected the wealth of those who possess it and acted as a universal currency without peer. The following characteristics are what makes gold a perfect component of every investment portfolio:
Gold is Finite: Gold is rare. All the gold ever mined would fit in to a cube 21 meters high. It could easily fit in to the Centre Court of Wimbledon. To put that in perspective that is the equivalent of one hours’ worth of global steel production. There is no new gold being created and above ground stocks of gold only increase at the rate that you can find it, mine it and refine it!
Gold’s is Real Money: For thousands of years, gold has been treasured as the most valuable form of money. Today, the largest buyers and holders of gold are the central banks of the world.
Gold is a Proven Store of Value: Although the price of gold may fluctuate, its value has never waned. In fact, gold has kept the same purchasing power for the last 1,000 years. As a real and tangible commodity that is limited by supply, the value of gold is inherent and does not diminish over time.
Gold is a Proven Safe Haven Asset: Time and time again during times of economic, geopolitical or systemic uncertainty gold has proven its ability to act as a safe haven asset, rising in value. This has been seen throughout history and more recently during the global financial crisis when gold prices went up every single year before the crisis and in the years during the crisis.
Gold Does Not Depend on the Performance of Others: Stocks bonds, property and currencies are dependent on the performance of management, employees, politicians and Central bankers in order to maintain or appreciate in value. Gold is not!
In fact gold tends to perform well when these groups of people fail to properly execute their responsibilities.
Gold is Highly Liquid: This means that there is always a readily available market of buyers and sellers for gold. It is as liquid as the international bond market, meaning that you will have no difficulty finding a buyer for your gold when you wish to sell, unlike other assets like property. Indeed, gold frequently becomes more liquid during times of crisis.
Gold is Useful: Gold is highly malleable and a great conductor of electricity. This makes highly sought after in electronic products from computers to light switches.
Demand for Gold is Rising: Demand for gold in industry and as jewellery has grown considerably with rising affluence in India, China, and other emerging economies. Furthermore, as confidence in the dollar continues to falter, China, India, Russia, South Korea, and other newly rich economies are aggressively stockpiling gold to hedge against a weak dollar.
So why not buy gold bars and gold coins to protect your wealth as well?
The Supply of Gold is Limited: Despite intermittent increases in production, the supply of gold is plateauing as mines age and gold deposits get deeper. At the same time, we haven't had any significant gold discoveries in the last few decades. As the costs of extraction rise steadily, the price of gold is set to rebound in the coming years.
What are the current warning signs that suggest that gold might be poised to significantly increase in value?
Why You Should Consider Buying Gold Now…
Despite the risk of trade wars with China and elsewhere deepening, continuing ultra loose monetary policies and uncertainty and potential chaos due to Brexit, many markets remain near record highs as most major asset have experienced a boom. As a safe haven asset during times of social, economic and geopolitical crises, why buy physical gold now?
Why not wait until disaster strikes then flee into gold investments like everyone else?
The following are some of the current warning signs that suggest that buying gold now is the prudent thing to do…
- Geopolitical Risks are Rising: That the world is poised for greater geopolitical instability is not in doubt. The risk of war and terror attacks appear greater than ever before, while the chaos caused by Brexit and the Trump administration threatens to wreak havoc on the global economy. A resurgent China and an increasingly assertive Russia further pose risks to global economic and political stability. The benefits of buying gold to hedge against these risks have never been more evident than now.
- Financial Markets and Assets at Record Highs: In the last decade, almost every asset category including property, stocks, and bonds have risen sharply due the extremely loose monetary policies pursued by central banks.
As we all know, overvaluation in the markets is usually followed by a correction. Markets are increasingly volatile and a crash is quite possible.
Although predicting a recession is difficult, we are no doubt closer to a bear market than ever before.
Buying gold now will protect your wealth by genuinely diversifying your portfolio in the event of sharp falls in financial assets or indeed property or indeed in the event of a financial crisis.
- Systemic Risk: The US and other leading economies are experiencing record levels of national debt, massive trade deficits, unsustainable budget deficits, and stagnating wages despite low unemployment levels. This is the perfect fuel for yet another economic and financial crisis.
As the 2008 financial crisis and EU debt crisis proved, the structural deficiencies of the world's largest economies are yet to be fixed. What's more, by bailing out distressed banks and lowering interests rates to near zero, governments have expended their ability to intervene should another financial collapse occur.
As a result “Bail-ins”, rather than “Bail-Outs”, will be more widespread in the next financial crisis, placing deposits at risk.
So why buy gold bars and gold coins?
The answer is simple; gold bullion is the best safeguard against these systemic risks.
- Real interest rates remain negative: Real interest rates, which is the nominal rate minus the rate of inflation, remain negative. As long as real interest rates remain negative, the price of gold should rise as a weakening dollar, euro, pound etc fuels more inflation. Also the low to negative yield on deposits and bonds means that there is no “opportunity cost” of holding non yielding gold
- The Dilemma of Easy Money: The Federal Reserve, European Central Bank, Bank of England, Bank of Japan and other central banks printed astounding sums of money to bail out banks and shore up the global economy after the 2008 crisis.
This easy money inflated asset prices led to booming markets.
The Fed is now trying to unwind its expanded balance sheet; an unprecedented move that will inevitably spook the markets and lead to increased volatility.
- Risk from Currency Shocks: Time and again, even the most trusted currencies have collapsed spectacularly once confidence in the economy wanes. From post-war Germany, Zimbabwe, the South East Asia currency crisis, and now more recently Venezuela and Turkey, one thing is clear; no fiat currency is immune to hyperinflationary risks.
- Central Banks Are Buying Gold: Since 2011, central banks around the world including China, Russia, Korea, Turkey, Kazakhstan, and others have turned from net sellers to net buyers of gold. Currently, almost a quarter of all gold ever mined is stockpiled by central banks. If central bankers are buying gold to hedge against impending risk, then so should you.
- Population Growth and Climate Change: Rapid population growth has significantly increased pollution, destruction of natural forests, overfishing and overexploitation of all natural resources to the detriment of sustainable economic growth. Along with climate change, rising sea levels, natural disasters, and increased desertification, the world economy could face extreme shocks in the future.
Gold's role in your portfolio and as a way to protect wealth will be indispensable during such turbulent times.
- Gold production is stagnating: Global gold supply is flat and set to decline in coming years. It takes several years to bring a new mine into production and taking into account increasing demand and limited gold reserves and the rising costs of extracting the gold from the ground, the price of gold should rise in future.
So, is there a right time to buy gold?
This is a great question one we hear quite often. Our answer today is the same as it has always been; we reverse the question and ask….
Is there a time when you should not own gold?
The answer is no. Gold always has a role in a portfolio. Not having any gold is a greater risk then owning gold at the wrong price. We believe gold is the foundation to a diversified portfolio, it shows that we accept that there are unpredictable risks that affect the values of our investments. It should be seen as a hedge against the unpredictable nature of governments, central banks and banks and the consequences that their actions have on financial markets.
As your most important form of financial and investment insurance, buying gold now is the most prudent decision you can make. With mounting risks to the global economy, gold looks attractively undervalued and represents a rare buying opportunity.
Physical gold is a lifesaving buoy in stormy financial seas.