Gold, The Ultimate Currency – Quote of the Week

As you’ve probably gathered by now, we like the way Greg Canavan of the Daily Reckoning explains things both clearly and in an Australian context.  He has been vocal about gold now being in a bull market, having predicted it would occur now early last year.  The following is a response to a reader voicing concern about gold being a non yielding, volatile, emotion driven asset….

“I advocate gold ownership because I consider it an important part of a diversified portfolio. With bond yields at record lows, stock prices around the world at, or near, record highs, and cash yielding nothing after inflation, it makes sense to hold some gold in your portfolio.

--Gold is certainly volatile. But does this make it an above-average risk asset? I note that gold priced in Aussie dollars is just below record highs right now. The ASX 200, on the other hand, is some 20% below its 2007 peak.

--Does this mean stocks are riskier than gold? No, it doesn’t, but it does tell you that owning gold throughout this time would have improved the performance of your portfolio, making it less volatile in turn. That’s a good thing.

--And as far as emotions versus fundamentals go, show me one asset class that doesn’t come under the influence of emotions. The stock market is a reflection of human nature. And humans are emotional beings. Don’t believe any economic theory that says humans or markets are rational. They aren’t.

--On your point about Buffett. I know Warren isn’t a fan of gold. You can’t compound your wealth by owning gold — and compounding is the key to Buffett’s huge wealth accumulation. I respect his view.

--But consider that — thanks to insane global central banking policies — there are now more than US$10 trillion worth of bonds around the world trading on negative yields. That is, it costs you to own them. And consider that the world’s major currencies are engaged in a stealth currency war. The aim of this war is to steal demand from competing trading blocs by reducing currency values.

--So the fact that gold doesn’t have a yield — and produces no franking credits — isn’t a big deal. Presumably, you’ve got a big chunk of your portfolio allocated to stocks, which should satisfy your demand for yield. But you shouldn’t be 100% invested in stocks.

--As I’ve explained here previously, gold is a currency. Currencies don’t yield anything…not if you think of currency as physical notes in your wallet. Currency only has a yield when you put ‘money’ in a bank. That’s because the bank uses your money for other purposes, and pays you a pitiful amount of interest for the privilege.

--Gold is rising in price in all currencies because currencies are losing value. Gold is one of the few universal stores of value that tells you the real story.

--For example, I mentioned that gold in Aussie dollars is trading just below record highs. That’s a reflection of how much purchasing power our currency has lost over the years.

--Just about everyone in Australia knows how expensive a place it is to live in. Housing, health, education, food, beers…you name it. But to tourists from many countries, our prices are simply crazy.

--We’re fed the lie that prices are high because we are a prosperous nation. That’s true to an extent, but prices are high because of the falling purchasing power of the Aussie dollar.

--The near record high price of gold tells you that. When it comes to currency devaluations, you can’t fool gold. One Aussie dollar now buys you the least amount of gold in its history. What does that say about our dollar’s purchasing power? 

--You can’t consider gold without the other side of the equation — and the other side of the equation is currency. So when you say that Brexit and the future of the European Union are more important considerations than whether or not gold is in a bull market, you’re trying to separate a hip from its joint.

--They are bound together! More than anything, Brexit was a currency event. It weakened the pound AND the euro. Gold, an apolitical currency, benefitted from the vote more than anything.

--Gold thrives on political uncertainty. That’s because political uncertainty has a detrimental effect on currencies. And gold has always been, and always will be, the ultimate currency. 

--So I hope you can see that owning gold as a part of a diversified portfolio makes sense…especially in this politically fraught age. And I hope you can see that gold is in a bull market because of the things you mentioned, and not in spite of them.”

These views are even more relevant in the context of our Monday article on the RBA’s agenda to suppress the Aussie dollar further.