By John Fisher
There are six primary reasons why investors own gold:
- As a hedge against inflation.
- As a hedge against a declining dollar.
- As a safe haven in times of geopolitical and financial market instability.
- As a commodity, based on gold’s supply and demand fundamentals.
- As a store of value.
- As a tool for portfolio diversification.
Gold is a monetary metal whose price is determined by inflation, by fluctuations in the dollar and U.S. stocks, by currency-related crises, interest rate volatility, international tensions, and by increases or decreases in the prices of other commodities. The price of gold reacts to supply and demand changes and can be influenced by consumer spending and overall levels of confidence and affluence and many other factors.
Gold is produced primarily for accumulation; other commodities are produced primarily for consumption (except silver which serves both industrial and monetary needs). Gold’s value does not arise from its industrial utility and only nominally from consumable applications. It arises from its use and worldwide acceptance as a store of value. Gold is money.
In contrast to other commodities, gold does not perish, tarnish or corrode, nor does gold have varying quality grades. Gold mined thousands of years ago is no different from gold mined today. Therefore, existing gold is interchangeable with newly mined gold.
“A RECIPE FOR DISASTER? The global economic and financial market climate looks increasingly precarious. Financial imbalances have never been greater following an extraordinary period of easy money. Many countries have experienced numerous bubbles and massive increases in leverage, and global trade imbalances are at unprecedented levels.” (BCA Research)
In this decade, as the dollar suffers one of the greatest meltdowns in monetary history, gold is reclaiming its place at the center of the global financial system. Gold’s value, relative to most national currencies, is beginning to soar. Examine the following summary of the six primary reasons for investors to own gold. They may never be more relevant than they are today.
1. HEDGE AGAINST INFLATION
Gold is renowned as a hedge against inflation. As inflation goes up, the price of gold goes up along with it. Since the end of World War II, the five years in which U.S. inflation was at its highest were 1946, 1974, 1975, 1979, and 1980. During those five years, the average real return on stocks, as measured by the Dow, was -12.33%; the average real return on gold was 130.4%.
Today, a number of factors are conspiring to create the perfect inflationary storm: policy of extreme monetary stimulus, a long term decline in the dollar, rising oil prices, a mammoth trade deficit, and America’s status as the world’s biggest debtor nation. Almost across the board, commodity prices are up despite the short-term absence of a weakening dollar which is often viewed as the principal reason for stronger commodity prices.
2. GOLD – HEDGE AGAINST A DECLINING DOLLAR
Gold is bought and sold in U.S. dollars, so any decline in the value of the dollar causes the price of gold to rise. The U.S. dollar is currently the world’s reserve currency – the primary medium for international transactions, the principal store of value for savings, the currency in which the worth of commodities and equities are calculated, and the currency primarily held as reserves by the world’s central banks. However, now that it has been stripped of its gold backing, the dollar is nothing more than a fancy piece of paper. And voices rising up and calling for the replacement of the U.S. Dollar as the world’s reserve currency are becoming more widespread.
3. GOLD AS A SAFE HAVEN
There are a myriad of problems festering around the world, any one of which could erupt with little warning. Gold has often been called the “crisis commodity” because it tends to outperform other investments during periods of world tensions. The very same factors that cause other investments to suffer cause the price of gold to rise. A bad economy can sink poorly run banks. Bad banks can sink an entire economy. And, the integration of the global economy has made it possible for banking and economic failures to destabilize the world economy.
As banking crises occur, the public begins to distrust paper assets and turns to tangibles (gold) for a safe haven. When all else fails, governments rescue themselves with the printing press, making their currency worth less and gold worth more. Gold has always risen the most when confidence in government is at its lowest.
4. GOLD – SUPPLY AND DEMAND
First, demand is outpacing supply across the board. Gold production is declining; copper production is declining; the production of lead and other metals is declining. It is very difficult to open new mines when the whole process takes about seven years on average, making it hard to address the supply issue quickly. Gold output in South Africa, the world’s largest gold producer, fell to its lowest level since 1931 this past year as the rand’s gains prompted Harmony Gold Mining Co. and rivals to close mines despite 16 year highs in the gold price.
Growing Demand – China, India and Gold
India is the largest gold-consuming nation in the world. China, on the other hand, has the fastest-growing economy in modern history. Both India and China have liberalized laws relating to the import and sale of gold in ways that will facilitate gold purchases on a mammoth scale. China’s consumer class, meanwhile, is spending on everything from bagels to Bentleys – and will soon outnumber the entire U.S. population. China’s explosive growth “could be the dominant event of this century,” says Stapleton Roy, former U.S. ambassador to China. “Never before has a country risen as fast as China is doing.”
5. GOLD – STORE OF VALUE
One major reason investors look to gold as an asset class is because it will always maintain an intrinsic value. Gold will not get lost in an accounting scandal or a market collapse. Economist Stephen Harmston of Bannock Consulting had this to say in a report for the World Gold Council,
“…although the gold price may fluctuate, over the very long run gold has consistently reverted to its historic purchasing power parity against other commodities. Historically, gold has proved to be an effective preserver of wealth. It has also proved to be a safe haven in times of economic and social instability. It sometimes takes a period of falling stock prices and market turmoil to focus the mind on the fact that it may be important to invest part of one’s portfolio in an asset that will, at least, hold its value.”
6. GOLD – PORTFOLIO DIVERSIFICATION
The most effective way to diversify your portfolio and protect the wealth created in the stock and financial markets is to invest in assets that are negatively correlated with those markets. Gold is the ideal diversification tool for a stock portfolio, simply because it is among the most negatively correlated assets to stocks.
Diversification of investments can improve overall portfolio performance. Thus, many investors combine tangible assets such as gold with their stock and bond portfolios in order to reduce risk. Not all gold is created equal, however. Don’t confuse ETF gold and physical gold. One is metal, the other is paper. See my article on ETFs:
https://fisherpreciousmetals.com/gold/modern-day-alchemy-how-to-turn-gold-in-to-paper/
Actions to take now: As I note in most every article – it is very, very simple to know what to do now. While some are trying to guess whether the market is going up, or down, or sideways – who really knows for sure? While I have my opinion based on both fundamental and technical analysis (trading sideways within a channel between $1,050 and $1,220 with a breakout to the upside sometime this year,) I could easily be wrong. Therefore, I suggest you do what I just did over the past month. I made two additional purchases of modest amounts for my personal portfolio that I stuck away. I do not sell out of my personal holdings. I continue to steadily add to my personal holdings. Continue to buy in regular, modest increments without too much concern for price. We will look back in the next 2-5 years and kick ourselves for having not bought more while we were worrying about a few dollars on the spot price.
What to buy: There are some fantastic buys on 1 oz. U.S. Arts Medallions, British Sovereigns, Mexican and Austrian gold and 1 oz. gold bars.
Quote of the day:
“The desire for gold is the most universal and deeply rooted commercial instinct of the human race.”
– Gerald M. Loeb
