 Gold Bullion as a safe haven insurance
Gold bullion has always been considered a safe haven, what could be called 'crisis insurance' against unexpected economic disaster. No one likes to think about potential disasters but we still take out insurance which normally comes at a cost. Gold Bullion may drop in value but that is the price one pays for the safe haven insurance that this tangible metal provides.
Since 9/11 the risk to our personal safety and financial security has increased dramatically. There is war in Iraq and Afghanistan, atrocities in our cities are bringing terror to our doorstep, tensions between north and south Korea are at an all time high, Iran is suspected of developing nuclear weapons, and peace between Israel and it's neighbours is as far away as ever.
Confidence in the banking system and in governments is at an all time low with unprecedented levels of debt and deficit that will take years to rectify. Banks have gone bust and governments are on the verge of financial collapse. Currencies are volatile and the once robust dollar is no longer a sure bet.
Plans by governments to reduce debts include radically reducing public spending, massive job cuts, higher taxation and the biggest ever increase in money supply, more commonly known as 'Quantitative Easing'. This 'printing money' program is designed to create more financial liquidity that will hopefully 'oil' the economy and stimulate growth. However it also brings the spectre of massive potential inflation, the erosion of the buying power of cash.
There has never been so much uncertainty...
Gold Bullion, bought as a crisis insurance, can be sold when you think there are only good times ahead. The insurance could also be free if you sell it for more than it cost you to buy and store. If the price of gold drops and you get less, then the loss will represent the cost of the security that came with holding it. Some people prefer to build legacy and pass it on to their heirs for their protection.
Gold Bullion as an investment
Gold is a tiny niche investment opportunity in the enormous $150 Trillion world of financial assets. The total value of gold in the world only represents about 1% of this pool. If you gathered all the gold ever mined in the world it is estimated that it would fit as an 18m by 18m cube on a tennis court. Industrial processes consume more gold than is mined every year and so if any anything the amount of gold we have is decreasing. This scarcity of this metal keeps it valuable. Unlike paper money, it can't be printed on a politicians whim. As Voltaire said, paper money eventually returns to its intrinsic value, nothing. The purchasing power of paper money is in constant decline as inflation constantly eats into its value. As an example, the dollar lost over 98% of its value in the twentieth century.
Gold's safe haven credentials are not in question but it is not always a good investment if you are looking for growth. If you bought gold at its height in 1980 when gold prices reached over $850/ounce then, adjusted for inflation, you would need it to reach over $2400 today recover your money without any growth or covering the costs of storage.
As buying gold pays no interest or dividends and costs money to store, then you either have to hope that it will increase in price or you value its indirect benefits such as its beauty, protection as crisis insurance or its ability to spread risk as part of a diversified financial portfolio.
.gif) With gold bullion being both a commodity and a financial asset or even money, there are numerous factors that come together to determine its price. It is therefore very difficult to predict its future price. However at the time of writing this article, the price of gold bullion, when adjusted for inflation, is still a long way from it 1980 high. It would need to be over $2400 an ounce to beat that gold price and most would say that the world current economic circumstances are far worse than they were in 1980.
Had you invested $10,000 in gold bullion in 1999, your initial investment would have grown to over $40,000 by 2010 - a staggering 300% increase. The same $10,000 investment in stocks of the S&P index would have lost over $1,400. A 14% loss.
Bankers, producers and analysts at the London Bullion Market Association conference in Berlin in September 2010 predicted that the gold price will rise to $1,450 in 2011 driven by a lack of faith in central banks' ability to prop up the global economy. There was even talk of $2,000 an ounce.
The price of gold bullion has also been fueled by the fact that gold bullion in the form of gold sovereign coins is classed in the UK as legal tender, it is money, and so is free from capital gains tax and therefore very tax efficient.
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