Is gold going mainstream?

Is gold going mainstream?

Posted MAR 14 2012

Will Bancroft takes a look at the growing attention that gold is getting from investors and the media. Is this a flash in the pan? Is the attention justified? And, why are investors turning to gold? Read on for a discussion of why gold’s position in the investment landscape is growing.

Gold only makes up between one and one and a half per cent of global investments, and although gold’s recent bull market has lasted 12 odd years now, gold is still a relatively small and out of sight investment market. When considering gold, most people merely know that Gordon Brown sold most of our national loot in 1999 to 2002, when gold was at its lowest point in 20 years, in an event termed ‘Brown’s Bottom’. However, the attention and focus gold has been getting has grown considerably, even if few invest in gold.

Gold’s part in the investment landscape has been growing as the legitimacy of other investments has been declining. Gold is deemed an ‘alternative’ investment, but the fact is that the traditional investment world has disappointed us individual investors for too long now.

Comparing gold with equities

Investors in the world’s developed equity markets might feel mighty unimpressed with their returns since the turn of the millennium. The FTSE 100 is lower today than it was at the beginning of 2000, whilst the S&P500 is also down from the same start date. European equities maybe in a relatively softer period, but the EURO STOXX 50 are still in negative territory since the beginning of 2002.

Much retail wealth has gone unrewarded by the mainstream indexes, and inflation has quietly been picking the investor’s pocket further. Many retail investors have been sold the dream of ever rising equity markets. It’s been more of a nightmare. However, whilst equity indexes and fund managers have largely been disappointing, the gold price has been quietly putting in steady performances each year.

There are also more recent phenomena that have emerged these last few years that have compounded investors’ plight.

Inflation and dying money

Whilst inflation was not overly problematic during the calmness of the Greenspan era ‘Great Moderation’, it started to increasingly affect investors and savers immediately prior to and since the Credit Crunch. Inflation has consistently been above its target of 2% for a few years now. The Governor of the Bank of England, Mervyn King, has to write an explanation letter to the Chancellor each time inflation figures come in above target. This letter has become such a regular broadcast perhaps it is no longer an embarrassment to the ‘Old Lady’ of Threadneedle Street.

A growing awareness of inflation by the population, and changing future inflation expectations have contributed to the angst of today’s saver and investor. There are worried about the value of their money and purchasing power, and are increasingly noticing that gold investors have been sailing by rather nicely.

Compounding the notice we might take of official inflation figures, we in the developed West have witnessed another decline in the value of our money; when we try and spend it abroad. Western currencies have been steadily losing value against emerging market currencies, and against the currencies of places we often like to go on holiday.

Since 2007 the British Pound has lost value by approximately 40% against the Australian Dollar and the Vietnamese Dong, 31% against the Canadian Dollar, 25% against the South African Rand, 23% against the Thai Baht, 18% against the Brazilian Real and has even lost 25% against the euro. We have lost spending power on the international arena and it does not feel good.

Rethinking the housing bubble

Whilst much of the above was occurring, we were soothed by the fact that so many savers and investors were seeing the value of their homes rise each year. Our homes often represented by far the largest part of our personal portfolios and for some years the property market was our darling, and often our financial saviour.

The Credit Crunch and the bursting of the housing bubble, although to a lesser extend in the UK than US, provided a painful reality for many. According to the Halifax National house Price Index, in the UK, the average house price has fallen from £197,244 in January 2008 to £160,907 in January 2012. This represents a decline of more than 18%, and it was much worse in the US. The housing market’s wealth effect had become negative, and the sickly housing market with its confidence shot is propped up by incredibly low interest rates. This was even more painful when inflation is factored in.

Savers, investors and much of the population are now in a tighter financial bind. All the while the media was mentioning constantly rising gold prices, but often with a negative slant on gold and frequent mentions of gold being a bubble. Perhaps it is not surprising then that to this day very few in the UK own gold even though they know about rising gold prices. How many friends and family do you know that have a significant proportion (5%+) of their wealth in gold? (We’d be interested to read your thoughts in the comment section below.)

Growing appreciation of gold investment

Safe havens seem to be few and far between for investors today, but popular understanding of gold’s legitimacy as an investment is growing. Gold investment is first about capital preservation and maintaining purchasing power, and secondly about potentially achieving capital appreciation. It is best to see gold as a better way to save your money, not as a speculative bet to make lots more of it.

Gold cannot be printed, counterfeited or inflated. It has no time limit, counterparty risk, or shelf life. It is liquid, portable, divisible and consistent. This is why it has made such sound money for thousands of years of human progress. It sits there quietly doing its job depending on no-one.

One should not be put off by gold not being an income-producing vehicle. Gold is not meant to be like a stock.  Gold’s function is as money and a store of value. It should thus be compared to pounds, dollars, euros, gilts, treasuries, etc. The dollar and pound have lost over 95% of their value since 1913. Gold can be considered a superior savings mechanism and is now an asset class that it getting growing attention and acceptance.

Our leaders have boxed themselves into a corner behind mountains of debt, and continue to spend too much money. Monetary history has shown that this is not a sustainable state of affairs. The downfall of fiat (paper) currencies that are not backed by a commodity occurs due to debts and deficits. This is why it is sensible to put a percentage of one’s wealth into gold, and not be totally dependent on paper assets.

Swiss bankers have traditionally advised a minimum allocation of 10% to gold bullion to act as a solid foundation to our wealth and act like a financial insurance policy of last resort. Gold is one of the few assets that are not simultaneously someone else’s liability, and it could not be more relevant to today’s saver and investor. We insure our cars; our houses; our health; but too few currently insure their wealth. It’s not a case of doom-mongering, but of prudently preparing for the worst, whilst hoping for the best.

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