Using Gold as Wealth Preservation, for Self Preservation

How do you go about preserving your wealth in the the crazy economic environment that we find ourselves in today? A few weeks ago we quoted from Richard Duncan’s latest book, The New Depression:

‘The hard truth is that it is not easy to preserve wealth. If it were, the families who were wealthy 200 years ago would still be wealthy today – and generally, they are not. In the very harsh economic environment that is likely to prevail over the next ten years, it is likely that a great deal of wealth is going to be destroyed.’

Our advice at the time was to buy gold. In response, we received this thoughtful response from reader NM (edited for brevity).

‘You are very keen to persuade yourself and others that gold will preserve wealth. You take this (the above) statement to be true. I can think of plenty of wealth in the UK and Europe that goes back 200+ years and it tends to be based on land holdings, private companies, stockmarket equity, artworks and collectibles rather than gold, although gold would be part of the mix.

‘Encouraging everyone to go into gold is the epitome of the “I’m alright Jack, bugger everyone else” smart Alec selfish mentality that so bedevils western societies. You spent many paragraphs this year berating the zombies in public service and government.

I have no objection to that but you are coming exceptionally close to that mentality of “we know best” – that it is a simple matter of pressing that button and pulling this lever. That there is a logical answer to the pickle we are in and that there is a group of people out there on whom we can land all the blame.

‘No one had to buy all those over priced houses with a miniscule deposit or “invest” in dotcom equities. No one had to vote in the Labour party on the basis of completely throwing out Work Choices legislation when a few amendments would have been sufficient to improve what was clearly putting more people to work. No one has to go on strike yet industrial action is on the rise.

At the top end, upper management is still doing everything to enhance their bonuses – until very recently the number of companies buying back their own shares and cancelling them to improve the Price/Earnings was at an all time high.

They should have been giving the surplus back to their shareholders but they were encouraged to take this course by the fund managers. All of that wealth, that could have been put to better use in the hands of shareholders, will disappear as markets collapse.

‘The point is that we are all complicit – society, the economy and the culture are all a function and product of what has gone before. I believe there is only one really sound piece of advice that you can give to anyone as we paddle thin air like the roadrunner who has run over the cliff – that is to pay off as much debt as possible so that your home equity is at the very least above 35%.

People are already doing that to a large extent which is why the economy is in trouble but there is no avoiding that. The politicians and the bankers continue to sell the line that there is a way out. By the time they realise that it is not true the Dow will be well on the way to 1000 points. More than 30 years will have vanished in a mist of complacency and hubris.

And gold? Well who knows but I doubt that it can withstand a deflationary episode commensurate with the trillions of dollars of inflation that brought us to this point. The question you should be asking yourself is why is gold not going up?’

Let’s start with the wealth preservation thing. And we’re talking preservation, not creation. Jim Rickards recently wrote about this:

‘When one enquires of family members and representatives as to what it takes to preserve wealth over centuries and not just cycles, the frequent reply is ‘a third, a third, and a third. This is shorthand for dividing one’s wealth into one-third land, one-third gold and one-third fine art.’

Note that government bonds are not on the list. And yes, gold is not the only way to preserve wealth. But with land / housing in Australia ridiculously overpriced, and fine art being out of reach for most of us, gold remains as a standout, humble preserver of wealth.

We agree that buying gold is selfish. But what do you think drives human action? Survival, self-preservation…

The world is made up of individuals. Acting in their own self-interest. Selfishness is not the same as greed. We own gold. We do so to protect our savings, to ensure the financial well-being of our family. Do you really expect us, or anyone, to leave all of their savings at risk (in the banking system) just because it might be better for ‘society’ to do so?

If the world wasn’t run by a bunch of crooks, we’d be happy to do it. But it is, and we don’t trust them one little bit. So we take our meagre savings out of the system, in protest against the clowns running it. If enough people did it, the system would cease to function. It would cause great upheaval…and ironically, the selfish gold owners (the messengers) would be shot.

But out of its ashes a better and more sustainable system would emerge. We have no idea what that would be. But we reckon if left to its own devices, without government intervention, the collective wisdom of humanity would come up with something better than the debacle we have now.

NM asks ‘why is gold not going up?’

Does a nine month time horizon matter when we’re talking generational wealth preservation? No.

As Rickards says:

…success in wealth preservation requires a longer view, infused with a sense of history and a keen appreciation for worst case scenarios that too frequently become real.’

We think we’ve come up with a way to help preserve your wealth in the coming China Bust. We outlined a worst case scenario for China in a recent presentation. Its ‘becoming real’ right now. Click here to view the presentation.

Lastly, here’s a brief note from our mate Dan Denning, on why you should only vote if you want to.

Thinking of trying to change the world with your vote? Think again! Australian historian John Hirst will tell you, ‘Why Australia Should Abolish Compulsory Voting,’ when he speaks in Melbourne at the Olio Cucina restaurant just off Little Collins Street next Wednesday evening. His appearance is sponsored by our friends at Thought Broker.

The lovely ladies at Thought Broker like to provoke interesting conversation, debate, and good eating. You can think with friends (or complete strangers) from 6:30pm on Wednesday, July 19th. Dinner costs $60 and includes two courses and wine. You can RSVP here and pay for your ticket here.

We have no commercial relationship with Thought Broker, except perhaps that we’ll get our money’s worth on the wine. More importantly, Hirst is a founding member of the Australian Republican Movement. We’ve made our views on compulsory voting clear when we praised the Eureka Rebellion. But Hirst is an Australian and a proper historian. We’re keen to hear what he has to say. And if you do make it, please be sure to come up and say hello.


Greg Canavan
for Markets and Money

From the Archives…

How to Survive Inside China’s Financial System
06-07-2012 – Greg Canavan

China’s Economic Policy of Denial
05-07-2012 – Greg Canavan

The Question China Has To Answer Fast to Save Its Economy
04-07-2012 – Callum Newman

How Investing in Commodities Can Prevent a Personal Financial Crisis
03-07-2012 – Dan Denning

Wouldn’t it Be Nice to Not Lose Money on the Australian Share Market?
02-07-2012 – Dan Denning

Greg Canavan
Greg Canavan is a contributing Editor of Markets and Money and is the foremost authority for retail investors on value investing in Australia. He is a former head of Australasian Research for an Australian asset-management group and has been a regular guest on CNBC, Sky Business’s The Perrett Report and Lateline Business. Greg is also the editor of Crisis & Opportunity, an investment publication designed to help investors profit from companies and stocks that are undervalued on the market. To follow Greg's financial world view more closely you can subscribe to Markets and Money for free here. If you’re already a Markets and Money subscriber, then we recommend you also join him on Google+. It's where he shares investment research, commentary and ideas that he can't always fit into his regular Markets and Money emails. For more on Greg go here.

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4 Comments on "Using Gold as Wealth Preservation, for Self Preservation"

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I think NM’s letter was awesome and very well written. I tend to feel the same way. As much as I’d like gold to hit 2000 AUD, I don’t think it’s going to happen. Having said that, if gold can buy me a safe passage out of a country in chaos for example, what does it matter what the dollar value is. I see gold as something to barter with when nothing else may be accepted. A system collapse is not entirely implausible.

I don’t understand NM’s sentiments at all. If you see the end of the system coming, it’s completely irresponsible for yourself and family to do nothing about it. And since you can’t stop the system from crumbling, the best you can do is prepare and then help others be prepared, and that’s about the extent of one’s responsibility to society at large. A persons natural place in society is as part of a community because as a person in a given community you contribute to it, and it to you. At a state, national, and especially international level, you are… Read more »
Lynn De Lacey

I come from a continent (Africa) where the use and real solid value of gold, silver, and such has always been recognised by most who live there as the only way to survive crumbling economies, fallen governments, and general chaos of every description. Interesting times we live in! I’d lay my life on betting gold and silver come up trumps eventualy.

Ian M.

I applaude you guys for the content published ,I was put onto it ( The Daily Reckoning ) by a workmate 3 years ago . Without it I would not have understood the bigger picture of what is happening and why on the world economics stage ,along with some of the history behind it all .Example The Gold Standard, I had never heard of before .

Many thanks for the educational journey and keep it coming .

Perth WA.

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