Jun 032015

If you needed any further justification to take the plunge and invest in some precious metals, or to add to current holdings, then read on.  Below we provide our first half dozen reasons why, in no particular order, investing in gold may just be a good idea.

1. Excessive Global Debt

Whether you consider Sovereign, Corporate or Private (individual) debt we are at or near historic highs on almost any metric you might care to evaluate. The markets attempt to deleverage after the Global Financial Crisis/Great Recession was offset by Sovereign state bailouts, financial repression and rampant money printing.  The ongoing suppression of interest rates has allowed numerous struggling parties – be they Corporate, Individual or Sovereign – to continue to service, and in some cases add to, the high levels of debt held on their respective balance sheets.  Greece is perhaps the most public example of ‘debt retention’ where potentially the more prudent and fair solution may have been for a constructive default.  The combination of these excessive debt levels with the apparent refusal to allow the market forces to prevail (and subsequent defaults to ensue) has somewhat tied the hands of Sovereign states and their related central banks – largely leading to the following 2 points.

2. Low Interest rates

Many critics of gold point to its lack of yield as a key weakness of gold ownership.  Although it may be tempting to dismiss this out of hand, there is no denying that by allocating some of your precious resources to gold ownership, you are accepting the opportunity cost of not receiving any yield and/or income.  However, in the low interest rate environment that we currently have throughout the developed world this opportunity cost is greatly reduced, if not negated entirely.  As a matter of fact, in some jurisdictions, negative interest rates have already been introduced, and some bond yields have already dipped into negative territory. Interestingly in both of these specific aforementioned circumstances, gold actually starts to have a more attractive yield.

3. Money Printing

Call it quantitive easing, asset re-purchases or ‘one of three arrows’, the results are largely the same – a significant increase in the balance sheet of central banks and a considerable monetary influx into the financial system.  Given the digitisation of our financial system, this is easily achieved without even actually printing any additional circulating currency – just simply adding a few zeros via computerised systems achieves the objective.  How much this translates into genuine stimulus at main street level is debatable, although it’s unclear if this is genuinely the desired outcome.  At this stage there is little end in sight for this unconventional monetary stimulus – as soon as one jurisdiction puts the baton down, another comes to pick it up.  As we are in uncharted waters, it is unclear what inevitable outcome this will have on the global economy in the medium to long term, but what is clear from history – more money chasing the same amount of goods (including gold) inevitably leads to increasing prices.

4. Currency Wars

It is somewhat inevitable in any low growth global economic environment that beggar thy neighbour policies get some airtime, albeit not necessarily publicly. Given the resistance internationally to increasing barriers to trade through tariffs and restrictions (a great lesson learned from prior financial calamities, not least of which was the Great Depression) various Sovereign states are required to be more subtle in their attempts at ‘stealing’ growth from competitors.  A tried and true method of achieving this is by weakening the currency, making imports more expensive and exports and labour costs cheaper, providing a quick and easy boost to competitiveness. Unfortunately this is perceived as preferable to true structural reforms and resultant productivity gains that actually may benefit the global economy in the long run.  As more nation states engage in currency debasement, real assets become increasingly attractive.

5. Financial system fragility

The Global financial system is now so integrated that a crisis in any one area could easily set off a contagion effect, reverberating throughout the global financial marketplace.  We must also consider the derivatives market, with value estimates from 600 trillion to as high as 1.5 quadrillion – that’s 1,500,000,000,000,000.00 in numerical terms – or at least 20 times global GDP.  Yes – you read that right, the current global financial system supports ‘hedging transactions’ (I use the term loosely) that in total face value are equal to more than 20 times the total measured output of goods and services from every man, woman and child on our planet.  In light of these facts, I think it’s relatively easy to acknowledge that there is some fragility within the system (Ed note – this sentence is being nominated for understatement of the year).

6. Geopolitical Risk

Although this is an issue that never seems to fully go away, no matter how enlightened and learned we become as a collective race, it does appear that of late the risks have been heightened.  The Middle East continues to be somewhat of a powder keg with Syria, ISIS, Iran and the Saudis ‘incursion’ in Yemen all vying for print space on a regular basis.  Looking to Asia we have the US openly stating they are engaging in a ‘pacific tilt’, including in relation to force projection, clearly attempting to contain a rising China. Additionally, China themselves have been throwing their weight around in their own backyard with the South China Sea seething with territorial disputes. The renewing of tensions between Russia and the US (and greater Europe), most aptly represented by the conflagration within the Ukraine, shows that even geographical locations close to the ‘developed world’ are not free from open conflict.  Given Europe has given rise to 2 of the most bloody and destructive conflicts in human history, it’s not overstating the fact that geopolitical risks are somewhat heightened.

Tomorrow in Part 2 we will finish off our 12 reasons to own gold now.