Wednesday, 2 December 2009

The Problem of buying Gold

The Problem of buying Gold

As many friends and colleagues know , I have been interested in Gold as an investment for some time. Gold double- bottomed in US dollars in August 1999 and then again in February 2001 at around $252.I expect it will go considerably higher (currently $1210)

The problem about buying Gold is that individuals and traders often make the mistake of viewing it as a trade. “Making money in Gold is a good thing”; don’t be so sure. A rise in gold usually accompanies either much higher inflation or a deflationary bust as under the Gold Standard in the 1930s. In today’s environment a much higher gold price may even reflect the possibility of governments defaulting on their bonds. It is perhaps better to regard Gold as an insurance policy.
Imagine a friend boasting that they just received a payout of $100.000 on their health insurance. Is that a good thing? Of course not, their health must have been seriously in danger for such an award. Equally house insurance for fire or car insurance. You don’t want the pay-out. If Gold rises to $5.000 the profit itself will be a good thing but most investors will have more serious problems to worry about like social unrest, banking failures, the safety of their families, fuel shortages etc.
This would suggest that Gold is best held as a hedge against crisis. Jim Sinclair[1] is clear about this. The leveraged trader will be lucky to make money in the bull market because the volatility will be so huge that just one mistake could wipe out years of gains. The day after Gold peaked in New York at over $850 in Jan 1980, it opened in Hong Kong at $750 and kept falling That was a remarkable $100 “gap down “.
The most important aspect of holding gold is knowing why you hold it. This might seem a ridiculous comment but as this bull market accelerates many people seem to be buying because “its going up “ . Are you buying it on inflationary fears or general fears? Gold has done well in both environments and Martin Armstrong[2] shrewdly points out that a rising gold price under the gold standard reflected a deflationary crisis but after Bretton Woods collapsed , a rising gold price was symptomatic of ensuing inflation. I don’t want to enter the inflation / deflation debate on this blog, however it is clear that in a certain way it’s irrelevant. Mervyn King was extremely candid when he simply said to the British public in 2008.”Your standard of living will drop”. That’s the point. Inflation-deflation is an argument worth discussing but secondary to whether you view the world as safe enough not to own gold. The inflation / deflation debate is less important than the hard-to-accept fact that either way your standard of living is going to drop to pay for the current mess. Like Fascism and Communism in extremis, the spectrum bends round and inflation and deflation become extremely close in practical terms. You are probably going to get poorer.

Simon GILLIS 1 xii 2009
[1] Jim Sinclair’s Mineset

No comments:

Post a Comment