Reasons to be happy – if you own gold!

Gold is money whose supply is not decided at the whim of human leaders. Annual gold production is about 1.5% of the total amount of gold in existence, so it is the demand for gold which determines its price. In contrast the major paper monies of the world, the dollar, euro, yen, pound  and Swiss franc all have Central Banks whose job it is to determine how much of their currencies to be created. Before the crisis, the rate of increase of supply of a currency was kept roughly in line with the nominal growth rate of their economy, somewhere around the 3-6% per annum range. However in recent times, this has gone out of the window. The policies of Quantitative Easing seen in Japan, the US and the UK in the last few years have massively expanded the amount of money in their financial systems. In Switzerland, in response to the massive appreciation of the exchange rate, the Central Bank has made public on several occasions its intention to create unlimited amounts of Swiss francs in order to prevent further appreciation. The ECB (with its Germanic bias) has indicated that it would never a policy of Quantitative Easing, but within weeks of taking office as President, Mario Draghi announced 2 Long Term Repurchase Operations, which permit European banks to borrow unlimited amounts of money for 3 years at 1% and encouraged all banks to make full use of this facility – a policy which has similar short-term effects as QE. The supply of paper money across the Western world has increased sharply in recent years and the rhetoric of those in charge implies that they remain very happy to continue that policy for years to come if they feel it necessary.

Interest rates are very low. Gold brings no income return, and so tends to perform poorly when the income return on other assets is high. Today the opportunity cost of owning gold is very low since the return on other assets is so low. In addition, such low rates of interest tend to occur at times of low or tough rates of inflation and …

Gold is the best hedge against inflation. Recent analysis by Credit Suisse looking at the performance of different asset classes in times of rising inflation over the last 100 years, showed that gold delivered the best correlation to rising inflation. A relatively new asset class that might also do this is inflation-linked bonds, however were the inflation to be substantial the amount that would have to be repaid by governments would rise significantly and could cause a sovereign debt crisis. Gold is no one’s liability, unlike inflation-linked bonds, and in that sense remains the best inflation hedge.

Gold is a great hedge against political uncertainty. The Arab Spring has brought enormous political instability into the Middle East. One of gold’s huge advantages over other tangible assets is it very high value to weight ratio – and this fact has meant it is very portable. If a rapid departure from home suddenly becomes necessary, the most convenient medium for taking your wealth with you is gold.

Gold is an indicator of wealth. Through the centuries in both China and India (representing one-third of today’s global population), gold has been the first port of call for household savings. However from 1952-2002, Chinese individuals could not buy gold. Indian per capita consumption is over twice that of China, so the Chinese still have some catching up to do. At a national level, the reserves of many Asian countries have historically been held in dollars with very little held in gold (in sharp contrast to the Western Central Banks which have always maintained very high weightings in gold).

There are about 5 billion ounces of gold in the world and about 7 billion people alive today – that is about $1250 or £800 worth of gold for each person. Do you have your share?


PS Note too that Greece’s credxitors were quick to ensure that they can seize Greek gold.