Jun 042015

Continuing on bravely from Part 1, we give you 6 more compelling reasons to own Gold.

7. The rise of Chindia

China and India, with almost 40% of the world’s population (combined total of nearly 2.7 billion people) albeit only 15% of global nominal GDP, are both developing and growing rapidly. Although there will be inevitable hiccups along the way, both countries are increasing overall GDP and, more importantly for gold, GDP per capita, at a fairly rapid rate. China is somewhat ahead of India on the development timeline, however there is hope that with the election of Narendra Modi, India will be able to further accelerate it’s development. There are clear indications that after many years of acrimony, these two developing giants are starting to find some fertile common ground. This is a significant benefit not only for them, but for the global economy at large. It’s also important to note that as well as a shared border, they have fairly complementary economical models with China focusing on manufacturing and India on services, including IT. Both countries have a strong cultural affinity with gold and further GDP per capita growth would likely prove supportive of gold demand in the medium to long term.

8. Equity market valuations

Given it’s continued importance in the global market place, we’ll put our emphasise on US Share prices. There is little question that regardless of which market ratio metric you care to use, the equity markets are richly valued. Earnings growth has outstripped revenue growth substantially in the last few years, largely as a result of a reduced cost of debt (as a result of interest rate suppression) and very active cost reduction, often in the form of labour cost savings. Combine this with the above average CAPE (26.9 now versus 16.6 historically) and we can see a reversion to mean in earnings (as a percentage of revenues) and the CAPE multiple could lead to a significant market re-rating. Critically, these are far from the only indicators flickering red. Please take note, I am far from suggesting that the stock market is due an imminent crash, as although prices appear elevated compared to history they have been more elevated in the past – the quote often attributed to John Maynard Keynes comes to mind: “Markets can remain irrational longer than you can remain solvent”. However, given the price correction gold has endured over the last couple of years it could certainly be argued that, relatively speaking, it’s become better value.

9. Diversification

Wherever you are on your savings and investment journey, diversification is key. You can be more aggressive or defensive in your investment approach, depending on what stage you are at in life, however you should never ignore the value and merits of diversification. Many are the stories of broken and bankrupt individuals or corporations who put all their eggs in one basket, only for that particular market to plummet and turn all their hard earned capital to dust. There are various asset allocation theories, such as the permanent portfolio, which largely operate under the premise that disparate asset classes perform differently depending on the condition of the economy. Although it can be convincingly argued that the modern monetary approach of interest rate suppression and money printing has had the effect of a rising tide appearing to lift all asset boats, and somewhat subverting the previous observed differences in asset class performance, there is little doubt that a certain level of diversification is still important. It would be prudent to include an allocation to hard assets (and gold/precious metals specifically) in any portfolio.

10. Eliminate counterparty risk

In todays highly financialised world, one entities asset is often another entities liability – in essence, there’s an owner, and an ower – and this clearly creates counterparty risk. Take something as simple as the cash you may hold at the bank – to you, that is an asset however to the bank it’s a liability – and that, for you, presents a risk. If the bank were to chew through it’s capital and reach a point of insolvency, you may become an unsecured creditor. I know, I know, most sovereign states provide deposit insurance, at least up unto a prescribed limit…however I think that is likely cold comfort for many holders of bank deposits in Cyprus a couple of years ago. Real assets in your possession overcome this counterparty risk issue – if you own it, and hold it, you aren’t reliant on any counterparty to make good on it.

11. History

Historically gold has proven to be exceptionally successful as a store of value. Whilst inflation has had it’s merry way with all fiat currency values, unscrupulously eating into the purchasing power of each note you hold (the king of kings USD has by some estimates lost 98% of it’s purchasing power since the formation of the Fed in 1913) gold continues to purchase, very roughly, the same amount of goods it has been able to purchase for centuries. To be somewhat glib, an ounce of gold could buy you a quality toga in classical Athens just as it can buy you are reasonable suit today. Perhaps surprisingly, even though the USD only purchases approximately 2% of what it did a little over a century ago, it is actually one of the outperformers in the fiat currency realm – you only have to look as recently as Zimbabwe to see some real destruction of fiat currency purchasing power. If you view gold as ‘savings’ and a repository of value, history is unquestionably on your side.

12. Insurance

Astute readers will notice this was the topic of my first blog post…and it hasn’t lost it’s relevance in the week since (surprising huh…). Due to some of the reasons contained within the dozen detailed in the last two days…and many more…gold continues to have a legitimate role to play in insuring your overall portfolio for the ongoing systemic risk, and volatility (and potential failure) inherent in the current global financial system.

So there you have it – a dozen solid reasons to invest in gold. There was an element of crossover with my initial blog, but with any luck the repetition has only served to reinforce the message. Feel free to contribute your own suggestions below – there are undoubtedly many more valid and appropriate reasons out there.

Keep an eye out early next week for a follow up blog where, in the interests of balance, we’ll give some reasons for not owning gold.