Gold Remains “Best Insurance For A Crisis”

Gold Remains “Best Insurance For A Crisis” - Ficenec [14]

– “Future is uncertain and gold is the most effective insurance against that”
– As fears grow about outlook for global economy – long term attraction of gold remains
– As “central banks race to devalue currency,” private individuals are buying record amounts of gold
– “Gold is simply the best insurance against inflation, or deflation”

Editor’s Note: The tragic events in Paris, terrorism and war throughout the world, show geopolitical risk remains high. These risks will likely impact economies and financial markets and will see continuing safe haven demand for gold

The price of gold might be falling, but private individuals are buying record amounts of the precious metal, and as fears grow about the outlook for the global economy the long term attraction of gold remains according to John Ficenec in The Telegraph today [15].

UK Gold Sovereigns

The strength of the US dollar and the threat from rising interest rates have made it a tough year for gold. The yellow metal was down 9 percent last week to reach a five-year low at $1,083, and that marks a 43 percent fall from the all-time high of $1,900 reached in 2011.

However, the fundamentals, characteristics and attractions of gold are undiminished because we remain in times of extreme intervention by governments around the world and for thousands of years gold has been the best insurance during times of uncertainty.

Demand remains strong

This theory was proven in the latest report from the World Gold Council that showed bar and coin demand increase by 33 percent during the third quarter to 295.7 tonnes, led by a 70 percent year-on-year increase in Chinese investment. UK demand for owning physical bars and coins jumped 67 percent to 2.5 tonnes.

The first rule of investment is preservation of capital. The second is to go searching for gains or income that fit with your appetite for risk. Gold has been the insurance of choice for thousands of years to satisfy the first rule, despite the fact it generates no income and actually incurs costs for storage.

US Dollar weighs on gold

It is that lack of income that is driving down the price of gold at the moment. Gold’s big rival as a store of value is the US dollar.

The market expects the US Federal Reserve to increase interest rates in December, marking the first rate increase for nine years. As the returns from holding safe haven assets such as US government bonds increase then the attractions of gold are diminished.

Bad money drives out good

One of the most interesting reasons that can be linked to the falling gold price is to be found in “Gresham’s Law” that “bad money drives out good”. The Tudor financier, Sir Thomas Gresham, found that: “When a government overvalues one type of money and undervalues another, the undervalued money will leave the country or disappear from circulation into hoards, while the overvalued money will flood into circulation.”

Artificial currency devaluation is nothing new. It is as old as the pyramids themselves. Sir Thomas Gresham was merely drawing conclusions from the studies of the Islamic scholar and historian, Al-Maqrizi, who noted the effect of currency devaluation during the Mamluk empire in Egypt.

Al-Maqrizi observed the effect of a liquidity crisis on the Mamluk dynasty in the early 15th century that caused money circulation to dry up. The solution was mass enforced currency devaluation through replacing the gold-and-silver-based Dinar, with copper coinage, or Fulus, and for a period the Mamluk economy recovered rapidly as trade once again flowed freely.

However, inflation soon crept in and prices ran out of control as the currency was repeatedly debased. All the while gold hoarding was taking place behind the scenes.

Fast-forward half a century, and the money printing continues apace, while demand for physical gold is rising sharply. The latest government to devalue its currency to support the slowing economy has been China.

The People’s Bank of China is cutting interest rates and allowing the value of the Yuan to fall. Chinese citizens concerned about their loss of spending power are buying gold. Gold is simply the best insurance against inflation, or deflation.

Tight supply

The other long term support to the gold price is that when prices fall below $1,000 many miners will be forced to cut output. The gold mining industry invested millions in projects that are only profitable when prices are above those levels, and it has been absolutely hammered by falling prices.

The future is uncertain and gold is the most effective insurance against that.