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Why Everyone Should Own Gold

Posted on: 2016-01-07
 “Water is best, but, shining like fire blazing in the night, gold stands out supreme of lordly wealth."

                            Pindar - First Olympian Ode

Since the Greek poet Pindar described gold in these glowing terms in 476 BCE, its identification with wealth and stability has changed very little over the ages.

Why own gold?

Three of the most fundamental reasons for owning gold are the following:

• For economic security

• For physical security

• Against contingencies

For Economic Security

Gold is an excellent long-term hedge against inflation, declines in the value of man-made currencies and turmoil in financial markets.

Over the long-term, despite the sometimes quite significant short-term price fluctuations, gold has been shown to maintain its store of value in terms of real purchasing power. In other words, as the value, i.e., purchasing power, of the dollar falls, the price of gold, which is priced in dollars, rises.

Unlike any of the world's currencies, each of which represents debt incurred by their respective issuing governments, gold is not a liability.  And since it is not a liability, it can neither be repudiated, nor its value undermined. Gold is not dependent upon anyone’s promise to repay. It is an asset in its own right. Governments can resort to the printing press and modern forms of “stimulus” but they can’t print more gold. This stands in stark contrast to the world's paper currencies that, printed as they are, by ‘fiat,' always lose value in the long term.

In addition, when major stock markets and other markets, such as real estate, have suffered steep declines, gold has tended to move in the opposite direction. 

For Physical Security

Gold is a secure asset.

In the past, when there was a gold standard, governments banned individuals from holding gold - preventing those individuals, in effect, from holding (and preserving) their wealth beyond the control of government. As the young Alan Greenspan put it in 1966: "In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. If there were, the government would have to make its holding illegal, as was done in the case of gold." Now, however, gold can be freely held.

Held as an asset, not only is gold liquid, but it is also subject neither to the freezes nor to the imposition of exchange controls that can, at times, threaten other asset classes and currencies. As, once again, Mr. Greenspan put it back in 1966: "It [gold] stands as a protector of property rights." It has a physical security not associated with any number of other assets. 

Unlike paper investments, physical gold investments have real value that you can feel when you hold a heavy gold coin in your hand.

Against Contingencies

Gold is an excellent "crisis" hedge.

Undisputed worldwide as a store of value, gold can be a form of "insurance" both in times of crisis and when there are extreme untoward movements in other asset classes. For example, during the period of hyperinflation in Germany from 1918-24, gold maintained its purchasing power while the value of bonds and stocks were catastrophically diminished.

More recently, here in the United States, in the period of “stagflation” from 1973-1974, which saw the S&P 500 decline 45% in 21 months, the price of gold doubled. Then, in October1987, when the US stock market suffered its biggest one-day decline in history, the price of gold rose. And, during the severe financial and economic crisis of 2008, which saw both stock prices and real estate values cut in half across a broad front, the price of gold once again climbed.

Set apart as it is from other commodities because of its acceptability, portability, homogeneity and indestructibility, the market in gold is both universal and highly liquid. You can buy and sell gold around the globe.

What place should it have in my portfolio?

Gold is the perfect investment to protect your core portfolio of paper investments from an inherently unpredictable future.

A long-term asset portfolio needs to be diversified. Diversification helps reduce both risk and volatility. The key to diversification is a choice of assets with returns as little correlated to each other as possible. Essentially, each of your asset classes needs to march to a different tune: Movement in one should be reflected as little as possible in the movement of any other.

Since there is little correlation (it is, in fact, low to negative) between the returns on gold and on financial assets, such as equities, gold can help provide just such diversification (i.e., when financial markets fall, the price of gold tends to rise, and vice versa).

A general market decline, therefore, will not be reflected in a general decline in the price of gold. Gold will, in fact, provide protection against such declines.

Owning physical gold is like having fire insurance on your house.  Almost every homeowner in America owns fire insurance on their home.   Why do you own fire insurance?  Are you expecting a fire?   Are you planning a fire?  No, of course not!  You own insurance because you realize that sometimes things happen that are simply beyond your control.  Owning gold in your investment portfolio is like a small but crucial insurance policy on your financial future.

In addition to reducing risk, improving a portfolio's diversification will also help to reduce its volatility. Reducing its volatility will, in turn, often result in higher compound rates of return.

While it is more usual to look at different asset classes when building a portfolio, in the case of gold, it is certainly worth considering it as an asset in a class by itself.

Conclusion

Since timing the market is impossible and your investment in gold is for the long run, the important thing is that you own gold, not when you buy it.

Gold protects against all kinds of uncertainty, from the insidious to the geopolitical to the bizarre.

To put it simply, everyone should own some physical gold to act as insurance, just in case. You will never actually know that you need financial insurance until it is too late, so you have to purchase gold before your think you need it.  Gold is the asset class of choice for proper portfolio diversification

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