If you’re a gold investor, you probably need an occasional reminder as to why you’re holding gold in the first place.
Watching the markets write off bullion as nothing but useless junk is difficult. Resisting the temptation to offload your investments isn’t easy.
But there are good reasons why you should make an effort to go against the grain. I’ll get to them shortly. But first a quick mention on the current market in relation to gold valuations.
Last week I talked about why gold prices are falling in recent months. It largely comes down to price manipulation, stemming from activity on futures markets. You can read all about that here.
But I won’t dwell on that today.
Instead, I want to explain why the bearish outlook on gold shouldn’t sway you.
Gold is currently trading at $1,470 an ounce. Since 2012, gold investors have watched the metal lose value for three consecutive years. That was the recent high point for gold prices, when they reached a high of $1,806.
But it’s important to remember that this still represents massive gains on longer term trends…an ounce of gold sold for $600 in 2006.4
Then the global financial crisis came, and gold prices catapulted. The economic turmoil, along with the low interest rate environment, sent investors running for safety. Between 2006 and 2012, gold roughly tripled its price. Not a bad return, right?
Slowly thereafter the retreat started. And that’s how we’ve gotten here today. After three years of sub-par performance, there’s now a full blown campaign of hostility directed against bullion.
Yet this shouldn’t tempt you to give up on gold just yet. It’s important to remember that gold isn’t an investment in the strictest sense. It’s a store of value that retains its worth when other assets collapse. That makes it the ideal hedge against return-driven assets like stocks.
Gold prices move in cycles
Gold prices have been trending down in recent years. But bear markets never last when it comes to gold. That’s because economic uncertainty is always around the corner. When it rears its head, investors flock to gold for safety.
Gold is currently in the middle of a price correction. The markets are happy with their stocks, bonds and cash.
But that won’t last. We’ve had two major stock market crashes in the last 15 years. Another one is looming.
It’s for this reason that holding gold, in whatever quantity, a good strategy. If the stock market underwent a collapse, the rush to safety would force gold prices up overnight.
For investors, that should confer gold a certain level of reliability. It’ll fall when the markets turn on, or manipulate, bullion, but it will appreciate strongly once financial chaos ensues.
China’s gold reserves are higher than they’re letting on
One reason why gold is down has to do with China. The Chinese government recently announced it had gold reserves of 1,658 metric tonnes. On the back of this announcement, gold prices fell sharply.
Observers and investors expected the Chinese to have larger reserves. When it was revealed they didn’t, it triggered a bout of selling. But the thing is, the Chinese most likely do have larger quantities of gold. Sovereign Man blogger Simon Black asked the question every investor should have. Via Zerohedge:
‘Since when did anyone start believing official reports from the Chinese government?’
He’s completely right.
What interest does China have in announcing its true gold reserves? Absolutely none.
The Chinese are playing the game on their terms. By announcing lower reserves, gold prices plunge as a result. That just opens the door for the Chinese to buy even more gold. Mr Black explains:
‘China is sitting on trillions of dollars in reserve right now, a portion of which they’re rapidly trying to rotate OUT of US dollar.
‘So it’s clearly beneficial to the Chinese government if they can sell dollars while they’re strong and buy gold while it’s cheap’.
It’s such a simple strategy that it beggars belief investors took the bait.
Don’t mistake gold for paper currency
You don’t invest in gold to see instant returns. This is the hard cold truth many gold-deniers can’t seem to grasp.
That’s not to say you won’t see returns in the long run. In fact, if you invested in gold in 2006, you’ll be sitting on a 300% return even today.
But gold isn’t something you speculate on. That’s especially true for investors looking make returns by shorting gold futures contracts. Gold simply isn’t something you trade to make a quick buck. I mean, you can do that of course, but you probably won’t get very far. Gold just doesn’t fluctuate in that kind of manner.
Rather than thinking of gold as an investment then, think of it as a way to secure your wealth.
Secure it from? From economic crises which wipe out currencies. From the kind of volatility that sends investors, who steadfastly refuse to hold metals, broke.
Remember, paper currencies are fleeting. There’s been thousands of currencies throughout history that have met the same end. But the value of gold, as a long-term store of value, isn’t up for debate. Gold’s purchasing power hasn’t changed for millennia. It’s survived every single currency , and it will continue to do so.
That makes gold the perfect hedge against currencies. Your Aussie dollars won’t help you in the event of an economic collapse. Gold is the ideal insurance policy against the kind of bloated financial system in place today.
Granted, not every investor has the patience to use gold as a store of value that can protect them during a crisis.
If you’re one of these investors, you’re probably giving thought to dumping some of your gold reserves. That’s if you haven’t pulled the plug already amid the latest price drop.
But gold needn’t be a noose around your neck. You could easily readjust your gold holdings down, without exposing yourself to unpredictable events. In doing so, you’d worry less about your gold position, without jeopardising the safety of your portfolio and wealth.
Remember, gold is a store of value, not an investment. Despite the recent market correction, gold will rebound strongly when one of world’s major bubbles pops.
That’s something worth thinking about.
Contributor, Markets and Money
PS: Just like gold, the share market benefits from low interest rates. Both the US and Australian stock markets are continuing to push higher in 2015. Some say we’re already in the bubble of all bubbles.
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