Gold And The Doom-Monger Argument
Some investment gurus recommend stocks. Others are doom-mongers who preach the coming collapse of the global financial system. They believe that most of the modern world will spiral into a state of Zimbabwe-like hyperinflation. For them, it’s not a matter of if, but when paper money becomes worthless, and our investments wither away. I personally choose to take what the doom-mongers say with a large tablespoon of salt. Yet nobody knows what the future holds, which means that a financial apocalypse could still happen tomorrow. Here are a few reasons why you may wish to consider diversifying your investment portfolio to include a small allocation to gold.
The World’s Oldest Investment Insurance Policy
You should treat your investments like you would anything else of value. This means taking out insurance in case things go wrong. Gold typically offers fantastic investment insurance for two reasons:
- It holds its value over time better than paper money.
- It tends to perform well as an asset when the stock market is going down.
Why people have used gold as money for thousands of years
There are practical and scientific reasons why people have used gold as a monetary store of value for thousands of years:
- Gold is finite: more than half of the planet’s gold has been extracted over the last 50 years [2]. It’s estimated that 165,000 metric tonnes of the yellow metal have been mined throughout history. This would fill 3.42 Olympic size swimming pools.
- Gold is malleable: it can be moulded and transformed into coins, gold bars and jewellery.
- Gold is relatively unreactive: it doesn’t degrade in air or water, even over thousands of years.
- Gold is shiny: it has a natural yellow shine.
The paper money price of gold goes up and down over months and years. But over thousands of years, gold has held its value with remarkable consistency.
An ounce of gold once bought a toga for a Roman senator[3]. Today, that same ounce of gold is worth just under £1,000[4], or the cost of a tailored suit in London. In Babylonian times, a merchant could buy about 350 loaves[5] of bread with an ounce of gold. This still holds true (approximately) today.
It’s no use having millions of pounds if your millions aren’t worth anything. Having some gold in your investment portfolio is a great way to protect you from inflation. This is because no other form of money has such a brilliant historical track record of holding its value over time.
How Gold Can Behave in a Falling Stock Market
There’s an old saying in investing, which is to “own gold and hope it doesn’t go up.” This is because gold usually goes up when everything else is going down. Most investors see gold as a safety net; the safety being that gold is an exceptional long-term store of wealth.
The chart below shows how owning gold would have protected your investments during three of the major market events of the last two decades. The gold line shows the price of gold and the red line shows the S&P 500 index. It’s not always an exact relationship, but the chart shows how in times of market turbulence the price of gold went up, often by large amounts in very short spaces of time!
How to Invest in Gold
You should treat gold as investment insurance rather than as an investment. Depending on your own level of doom-mongering, it would be wise to buy £50 – £100 worth of gold for every £1,000 that goes into your investment portfolio. Check out this page for more on how to buy gold.
I’ve included some interesting quotes about gold below. But be warned, some of them quite doom-mongering!
“When paper money systems begin to crack at the seams, the run to gold could be explosive.”
— Harry Browne
“ Gold bears the confidence of the world’s millions, who value it far above the promises of politicians, far above the unbacked paper issued by governments as money substitutes. It has been that way through all recorded history. There is no reason to believe it will lose the confidence of people in the future.“
— Oakley R. Bramble
“In the long run, the gold price has to go up in relation to paper money. There is no other way. To what price, that depends on the scale of the inflation – and we know that inflation will continue.”
— Nicholas L. Deak
“Betting against gold is the same as betting on governments. He who bets on governments and government money bets against 6,000 years of recorded human history.“
— Gary North
“As fewer and fewer people have confidence in paper as a store of value, the price of gold will continue to rise.”
— Jerome F. Smith
- [2] Source: http://www.numbersleuth.org/worlds-gold/
- [3] & 53 Moneyweek gold profit plan, 2014. Available at: https://ribanomics.files.wordpress.com/2014/12/moneyweek-gold-profit-plan0.pdf
- [4] This price is at the time of writing. The gold price varies in the short run.
