By Ben Simmons
As we all become honorary Irish for the day Jan Skoyles looks at whether you really need to be lucky to invest in gold or is it down to the fundamentals?
If you are lucky enough to catch a leprechaun this St. Patrick’s Day then, in exchange for its release, it has the power to grant you 3 wishes. Fairy tale folklore has it that they store away their gold coins in a pot which sits at the end of the rainbow. I suspect many in Ireland will be leprechaun hunting this weekend.
We could all do with a bit of luck at the moment, but not when it comes to gold investment. Whilst it would be nice to find a pot of gold at the end of the rainbow, you don’t need to be that lucky to find such a safe place for your hard earned savings.
No one can predict a market, anyone who does will soon eat humble pie, or is uniquely talented. However you can study the fundamentals and you can also study history. Like anything, it always helps if you have luck on your side, but you’ll be even luckier if you know the marketplace thrives when everyone else’s chips are down.
When looking at investments it is all about looking at the risk versus the rewards. The issue of where to put your money is currently surrounded by so much uncertainty; whether it’s the Eurozone sovereign debt crisis, the future of the Euro or the strength of the US’ so called recovery.
When discussing luck, we all know there’s only so far we are prepared to push it and investing in the current market seems like push too far.
Both the US and the British Pound have decreased in value by 80-90% since the removal of the gold exchange standard. Meanwhile, with the Euro, people are unsure of how long it will survive.
There’s a reason why a pot of gold is central to a folk tale — it has been valued as precious and as money for over 2,000 years. Whilst emotions may have been running high in the gold and silver market recently, there is little reason why they should offset the security investing in gold can offer.
Warren Buffet has often disregarded gold buyers as ‘speculators’, but are we? Speculative investments using leverage require luck — more so than something with thousands of years of history. Like St. Patrick’s Day, the intrinsic trust in gold is something which is passed down from generation to generation.
So why do you not need as much luck for gold investment as you do for other investing? Because the fundamentals for investing in gold remain the same and stronger than they ever did. What’s more, we think that they will grow in strength as the year goes on.
Global debt is still building up, no matter what term the central banks use for money creation. Deficit spending continues at a reckless rate, particularly in the UK where we repeatedly here of strict austerity measures. And unfortunately we have little chance of electing leaders who are bright enough to lead us away from the paper money system.
When gambling and taking risks, you often have to calculate for a few unknowns; in the gold market, there are very few unknowns. Gold is the only asset class with a positive monetary correlation to inflation. Savers are still receiving negative real rates of interest, gold is in a bull market and maintains its value. This is handy considering we’re heading for record levels of inflation and reduced interest rates, in the UK, Europe and the US. If one thing is for sure, over the next decade the value of fiat money — our pounds, euros and dollars, will be dramatically affected.
The gold price is driven primarily by two measures; inflation and interest rates. Gold does appreciate with inflation, but it has increased six —fold in the last ten years. This is despite a quiet period across the UK and US for inflation. The gold price is the proverbial canary in the coalmine. This shows that the low interest rates and concern surrounding government spending and deficits are making the gold price canary sing a louder more distressed tune.
But surely gold’s record price rise indicates it’s in a bubble, haven’t we seen this before in the housing market? If gold were in a bubble, like the real estate and the dot com bubbles, then we would agree; luck is needed. But gold is not in a bubble.
The fundamentals pushing the gold market, namely government monetary policies, inflation and paper money, are still very much intact. Until they change, gold is not in a bubble and very few people own it.
The current risk for gold is if the Federal Reserve, and other authorities, really do believe the recently released data on the positive outlook for the economy. If this happens then they may normalise monetary policy before the current estimate of 2014. However, looking at John Williams’ ShadowStats, the statistics imply that the US’ official figures, particularly in the area of unemployment and growth, are not particularly indicative of the actual situation, which is far worse.
In many ways, if you own gold, you can sit back and relax, no need to stand at the poker table worrying about whether you placed a sensible bet. Because the other gamblers have got no idea about how the casino that they’re in works, nobody does. We’re in a huge paper experiment, which no one knows when it will end or how it will end, just that it will end. What gold investors know is that the yellow metal as proved its worth as money and a safe haven for your investments, during every paper money crisis.
Do you need the luck of the Irish to be a successful gold investor? No. But do you need the luck of the Irish to be safe from the fiat money system? Yes.