Monday, 22 August 2011

Always Believe in, because you are ... Gold

Spandau Ballet implored us to believe in our souls and gold.

If people feel part of their souls are contained in any asset they would probably say their home or their ancestors jewelery.

As far as I can see the present rush towards gold bears a lot of similarity to the lower to middle class obsession with residential property.

As with property, "they are not making any more of it". As gold is created at the centre of a supernova, you can't manufacture it in your garden shed. There are instances of land being created in the Netherlands by reclamation from the sea or dumping sand in the ocean in line with Dubai's tasteless Palm Islands development off the coastline but this is just whimsy. Property and gold are a hedge against inflation and a good store of wealth.

There is no way to value gold, there is no price to earnings ratio and no yield. While there is a yield on residential property, during the height of the boom the emphasis was on the yield not being a necessary metric and property traded like antiques.

If you take the view that all the excess liquidity that has been pumped into the banks to keep the financial system going is going to emerge from the banks and swamp us with hyper inflation before the central banks can retract it, gold is a great thing to own. If you can't believe in your governments currency you can always believe in gold.

On the other hand, I am disturbed to hear radio pundits telling people that they should hold at least 20% of their wealth in the hard metal. Shoeshine boy mania might well be under way. Should people's confidence firm we could see a savage correction which could hit terrified retirees. These are people who have already taken a severe hit to their net worth due to a decline in house prices. A second hit on gold prices would just be careless. The long term the trajectory will be up for gold and property however people's view of what is long term seems to be 2-5 years as opposed to decades.

It is often what are perceived to be the safest assets are the most dangerous, such as AAA rated securities and residential property as we have seen. The mantra that gold is the only safe asset is being chanted through virtually all media.

To my eyes, I think an untidy end to the Euro project could easily be in the tea leaves over the next few years where there is reversion to national currencies (the drachma, the lire, the punt, the escudo etc.) or the adoption of a party nation southern currency. The ensuing volatility and damage to capital of wild currency movements could make trips to London or Zurich to check on the family gold deposit not an unusual middle class occurrence.

To my mind the worry in relation to not owning a solid store of wealth is worth the risk of a possible 20-30% parabolic correction in gold prices which has been widely predicted.

In a super-cycle collapse the upside of owning gold would be quite extraordinary.

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