A long-term wealth preserver or a “Barbaric Relic”?

Few people in the West today hold any gold and few advisers suggest that their clients should include gold as part of a diversified portfolio.  Knowledge on the role that gold played as money and as a means of exchange in history is extremely limited. Degree courses in economics have little or no reference to explain why gold rose to prominence as money and how it was removed as the mainstay of a Sound Monetary System.  To understand gold and its unique historical role and the current relevance of gold it is necessary to undertake extensive research and seek out answers to questions that, once obtained, are surprising.

However, we would summarise the key reasons for holding gold as part of diversified portfolio as follows:

  • Gold is the best form of money – it is the most ‘marketable’ commodity on the planet; in other words it is the best liquidity you can hold. The 19th Century economist Carl Menger developed the theory of marginal utility with gold at the centre of the monetary system.
  • The history of gold is that it outlives all paper money currencies – Governments can devalue their currency into worthless paper but they cannot devalue gold.
  • Gold is nobody else’s debt – it therefore has no ‘counterparty risk’. When you deposit your savings in a bank or indeed when your salary is placed in your Bank account, you have just lent your money to the bank. Your savings form a portion of the Bank’s assets. In return, you are their creditor. You therefore run as counterparty risk.
  • Gold is scarce enough to be highly valued, but not too scarce to be unusable as a money. It doesn’t rot and cannot be destroyed. It can be decreed illegal to hold, as President Roosevelt did in 1933 when he prohibited the private ownership of gold and passed a law that carried a sentence of 10 years imprisonment or $10,000 fine if found in possession of gold.
  • Gold holds it value over the long-term; in the short term the ‘price’ of gold can be volatile as the value of currencies and other commodities fluctuates against a specific weight of gold.
  • Ultimately, it is a real asset recognised throughout the World as the final store of wealth and in this sense it is a final insurance against market crashes and financial crisis.

Further consider the following facts:

  • September 2017 – Germany completed its 5-year programme of repatriating 54,000 gold bars from the vaults in New York and Paris to their own vaults in the Bundesbank. The 27 members of the EU now collectively hold 10,000 tonnes of Bullion making it the largest economic bloc holder of gold in the World.
  • In 2015, when Greece was in the process of possibly leaving the EU and crashing out of the EURO, the then Finance Minister Yanis Varoufakis was advised by a leading debt re-structuring specialist to secure Greece’s gold bullion held in Athens as it was an important asset that would form the basis of a new Greek currency.
  • China has a policy of not selling to the bullion markets any of the gold it mines domestically. China is now the largest gold producer in the World. It publically encourages its people to personally acquire some gold. In addition to taking control of the Shanghai Gold Exchange, it is believed that China has now secretly accumulated vastly more than the official holding of 2,000 tons.
  • Russia makes no secret of their desire to continue to accumulate gold bullion. Their holdings are estimated to be 2,000 tons.
  • The USA is the single largest holder of gold with a declared 8,000 tons. When asked by Ron Paul why the Federal Reserve continued to hold gold in its reserves, Federal Reserve Governor Ben Bernanke said it was due to “tradition”. This statement from the Chairman of the Federal Reserve was designed to provide no meaningful explanation.
  • The US Dollar is steadily losing its position as the World’s Currency Reserve. This started when Richard Nixon removed the Dollar’s link to gold in 1971 which had previously allowed any country to redeem Dollar asses. China and Russia seek to reduce their use of the USD for international currency transactions.

We would conclude that gold is the best form of money and will again, in due course, be re-monetised as part of the Special Drawing Rights via the International Monetary Fund.  Holding some gold in the form of coins or bullion in LBMA recognised secure vaults offers the ordinary citizen the best hedge against another financial crisis.

How do you hold gold and in what form?  It depends upon your circumstances and personal financial position.  Ideally in Britannia one-ounce coins in an offshore vault through an LBMA accredited broker.  Don’t hold it at home.

Click on the image below to download a guide on Gold as an Investment

Risk Warning: Please note that the following are the author’s personal opinions and should not constitute investment advice.

If you are keen to understand more, call a member of the team on 01494 683100