Someone asked me recently “Why own gold, you can't eat it?” This is not the first time I have been asked this. Actually, you can't eat most investments. But more than this, gold has some unique characteristics...
If you are a regular reader of these columns then you will be familiar with our fervour for gold and silver, along with the mantra of “hold precious metals for the long haul”. Not ETF's, mining stocks or any other paper derivatives of, but physical bars and coins. So whether you're considering gold for the first time or looking to increase your holding, let me explain why I believe it to be one of the best commodities on the planet!
Gold is rare. I know this sounds obvious but it is always worth a mention. For example did you know more steel is poured in a day than all the gold ever mined throughout history. There are approx 155,000 tonnes of gold above ground, which is enough to fill three and a quarter Olympic sized swimming pools (8,000 cubic meters).
So what influences its value?
• Social and political turmoil
• Investors expecting inflation
• a country's falling currency
• stock market crashing
Known as the crisis commodity, gold allows you to hedge when there is a lack of confidence in a government or the financial markets. It is a great barometer of world events and during the chaos it becomes a safe haven. It is seen as an international currency. Wall Street is not fond of it because it cannot be manipulated or engineered. Gold can not be expanded with QE (quantitative easing) or loose lending (relaxed lending criteria) and because of this it is not easy to debase. Governments devalue their fiat currency i.e., dollar, sterling, euro, yen etc., through QE in order to push international trade and exports. Importantly gold is rising against all currencies because people all over the world recognise that a falling currency erodes your purchasing power. So to preserve their purchasing power, people hedge against falling currencies in order to protect their wealth. Your purchasing power is also eroded by insidious inflation. This is why many people turn to gold and silver as their preferred money.
Being a great hedge against a weak currency and onset inflation, is why the central banks and governments plough into it when the markets are falling, or when there is a round of QE which will devalue a currency. The World Gold Council recently pointed out that Central Banks are buying more gold than they are selling (but they won't tell you that), which is a first in decades. So if they are diversifying away from paper currencies and into gold, this will only push the price up. I think it says a lot about where they see things going!
Gold's liquidity makes it an amazing asset, as it can be bought and sold 24 hours a day all over the world. Much quicker than other investments to buy and sell in uncertain times, making it crucial in terms of getting your hands on your money as and when you need to. It is also worth holding because it is the worlds finite currency and held by most central banks.
Making up your mind
Gold is unique in that it is a commodity used for accumulation rather than consuming. Being a commodity, its price is subject to supply and demand and will be impacted by production costs and money supply. With any folio, diversity is the key to success, and precious metals should be one of several well considered uncorrelated assets. Gold is not a magic commodity that will make you wealthy. But as part of achieving a diversification strategy within a folio it is a great component. As with any commodity you need to be able to sleep at night, so you have to be comfortable with your exposure. There is no set percentage for a folio, it varies wildly from 5% upward.
I will leave you with the words of Oakley Bramble, reminding us of what happens when a fiat currency reaches the end of the road.
“Gold bears the confidence of the world’s millions, who value it far above the promises of politicians, far above the unbacked paper issued by governments as money substitutes. It has been that way through all recorded history. There is no reason to believe it will lose the confidence of people in the future.”
Oakley R. Bramble author of Depression-Inflation Survival Manual
If this has been of any interest or help please share. As always your comments are most welcome!