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Knowing
how governments will respond to deflation, the case for inflation-proof gold
looks increasingly clear to cautious wealth...
USELESS
for pretty much everything except storing wealth (its economic value is
social, not industrial), gold acts as inflation-proof money when investors
need it most – right in the middle of an asset-price deflation.
At least, that's how
people choosing to buy gold amid today's global deflation in risk assets see
it. Why else do you think German coin and small-bar dealers are being
emptied, even at 5% (and worse) premiums to "melt" value? Why else
did gold-hoarding deliver secure, rising purchasing power amid the Great
Depression of the 1930s...?
Given central banks'
default response to any level of financial stress, it's a unique and
appealing attribute. Because rather than leaving cash hoarders alone,
sub-zero real rates of interest – plus the ever-present threat of
massive devaluation – force sleepless nights on cautious savers. (The
risk of banking collapse is an extra, but non-government-inspired threat.)
So when there's a dash
for cash, it's little wonder that "worried wealth" finds gold
better even than Dollars. Because gold cannot be inflated, nor destroyed. And
it has 5,000 years of human use as a secure store of value behind it.
Yes, this month's
flight from everything into cash (which still means US Dollars worldwide) has
knocked the gold price 6% off its recent record high vs. the greenback. But
compared with all other assets bar Treasuries, however, gold shows phenomenal
strength so far. Oil is down 20%. Platinum is 15% off. Aussie Dollars have
dropped 10%, despite paying 450 basis points above cash deposits at the US
Fed.
And should the slump
continue, investment demand for physical gold is likely to put a floor under
gold prices much sooner than other "risk assets" find their floor,
just as it did during the Lehman Crash.
Amid financial stress,
physical gold hoarding creates a source of deep and widening demand that no
other asset class enjoys. Not even silver comes close, because institutional
and high-net worth buyers would rather get gold's significantly deeper
wholesale liquidity and much lower storage costs.
Indeed, it's hard to
class all "precious metals" together – in terms of price
behaviour – when the inevitable hits the fan.
Gold, unlike platinum
and silver, commands a "safe haven" premium that industrial
commodities can't – a critical point when credit dries up and risk
assets are converted back into cash.
Compare gold's
price-action with any other raw material, in whatever currency. When
confidence and economic demand sink, gold attracts capital. Whereas crude
oil, copper, soybeans, even silver and platinum...they're all vulnerable to
risk aversion, because their bull markets tend to rely on economic growth,
whether or not it's fed by money-supply inflation.
Gold, in short, is not
merely the "inflation play" that most analysts and journalists
think (if, indeed, they're thinking at all). Hoarding physical metal may not
seem a "sophisticated" reaction to current events. Hedging your
move into cash may not even outperform an all-Dollar position, short or long
term. But it is perfectly normal, historically evidenced, and sane response.
It also remains a
minority sport at present.
Adrian Ash
Head of
Research
Bullionvault.com
You can also Receive your first gram of Gold free by opening an
account with Bullion Vault : Click here.
City correspondent for The Daily Reckoning in London, Adrian Ash is
head of research at BullionVault.com – giving you direct access to investment
gold, vaulted in Zurich, on $3 spreads and 0.8% dealing fees.
Please Note: This article is
to inform your thinking, not lead it. Only you can decide the best place for
your money, and any decision you make will put your money at risk.
Information or data included here may have already been overtaken by events
– and must be verified elsewhere – should you choose to act on
it.
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