Absolutely nothing! Well, except 5,000 years of
value exchange, non-correlation, and preserving wealth...
GOLD's VALUE is under attack, writes Miguel Perez-Santalla at BullionVault. The current market environment has led many in the press to question
gold as an investment or an asset class.
There have been many pieces
written pointing to the 2013 decline,
now 27% on the year or 35% off the high of 2011. It would seem evenhanded to
make this determination on this rather short view of the market. The question
then exists, what is gold good for?
When looking at gold, one has to take a long-term
view. Gold's position in the marketplace, both in the public domain and
government function, has always come due to its primary purpose to humanity.
That is as a guarantee of value.
This guarantee comes from the simple fact that gold
is a constant. It does not change. Its value against other forms of money or
investment does. But the underlying asset, the physical metal, does not
change because of any socio-economic activities or global calamities.
The important thing to notice here is that gold
finds its demand as a material commodity of beauty,
function and form. It is a metal that has held sway
as a form of money and barter throughout
all of recorded history. It is one of the few constants
to exist in the economy of the human animal. Because of its everlasting
nature, and its ability to maintain its form uncorrupted, gold has withstood
the test of time as an important vehicle for the transfer of value in our
societies.
To analyze gold fully would fill miles of
book-shelves. We would have to study each separate economic environment to
determine how gold functioned versus other commodities or negotiable
instruments. Yet the thing to remember is that gold has always been available
in one form or another throughout hundreds if not thousands of different
economic systems. To consider making a gold investment or not in our current environment, we must to take a long view of what
really is a young marketplace.
In 1971 the president of the United States of
America, Richard Nixon, closed the gold window at the US Treasury. This meant that the US Dollar was no longer
convertible to gold. That freed the trade of gold in the US, with private
individuals able to buy gold for investment from December 1974. This also
meant that the other major currencies which were tied to the US Dollar
through the Bretton Woods agreement were also now free-floating. So the world
entered into a new experiment of unfunded money, often referred to as fiat
currencies.
Fiat means "Let there be" in Latin. Governments today are the sole authority behind our
money. Cut free from its use as currency, however, gold has since 1971 taken
its price from the increasingly free market in bullion worldwide. Within 10
years of the end of Bretton Woods, private individuals across the West world
could buy and sell gold. Ten years after that, the Indian government
deregulated its gold market, while the collapse of the Soviet Union also
spread freedom to trade gold in Russia and central Asia. Ten years later
again, China began opening its gold market too.
Besides these market freedoms, taking a look at any
single asset class since 1971 would also mean equating today with a period
before so many changes in technology and advancements in communication. But
on a 20-year horizon, US investors may want to consider gold and its value
against two specific economic indicators. First there's the Gross Domestic Product (GDP) of
the United States, the world's largest economy as a single country. Then
there's the Dow Jones Industrial Average (DJIA), the widely followed and quoted index of US stock prices.
If you look at this graph of GDP and the Dow Jones
Industrial Average you will note that they move almost in tandem. Of course
there are exceptions, but it is close, and with the Dow typically pointing
where the economy is headed. The numbers represent their performance on an
annualized basis up or down percentage-wise.
The following chart shows the change in gold prices
over the same period, again by percentage. You will note that gold has moved
in the opposite direction in most cases. So gold was equally fulfilling its
role as financial insurance when the stock market performed well. Because gold did
not.
What these graphs clearly indicate is that gold has
served its primary long-term function as a store of value when other things
fail. When major concerns about the global economy come into play gold is one
major tradable asset which has held up under pressure. Imagine, while looking
at the 20-year chart, that you were one of the investors who was wise enough
to keep a 5% to 10% position of their portfolio in gold and build it up over
that time horizon. They received the rewards, and reassurance, of the
conservative investor. Because their insurance program paid off.
While you consider this, ponder on how the stock
market is regaining much of its momentum on the back of Quantitative
Easing. This has profoundly changed the economic
environment. This current central bank action, which is an experiment, cannot
go on forever. How will the US economy react as its economic stimulus, an
addictive drug, is withdrawn or tapered? What withdrawal pains will be felt
in the stock market and global economies? Do you as an investor want to be
caught without any provisions?
Since the tech-stock boom turned into a crash during
2000-2003, we've had the building mortgage crisis of 2005-2007, the collapse
of Lehmans (and the near-collapse of everything else) in 2008, the start of
the Eurozone crisis in 2010, and the US debt downgrade of summer 2011.
Gold is now down significantly this year, 2013. But
this does not negate gold's value or use, and like any insurance policy the
best time to participate is before you need it. Gold's role as what
economists call a non-correlated asset – moving free of other major
indicators and investment prices – serves to protect rather than to enrich.
Of course, this doesn't mean there are not trading
opportunities for short term players as well. Yet making money this way is
possible on a daily basis it is not the primary purpose of gold ownership.
For instance Kraft Foods (KRFT). Its value as a stock is derived from the products Kraft sells and
distributes and not the price action of the stock. Still there are those that
trade it for the latter.
Such short-term traders have enjoyed plenty of
action in gold prices in 2013. But this year's price drop is only one page of
a very long history, and only one page of the current chapter, too. Gold's
timeless value, a constant for humanity worldwide, remains unaffected.
