In light of a market that has dramatic swings from one day to the next, the case for gold has never been more compelling. Gold brings a special element into a portfolio, one that makes it different from all other metals. It will act as an insurance policy for a portfolio. Everyone should have a core allocation to gold. Now more than ever it is paramount that investors eliminate risk exposure by owning physical gold.
Traditional asset allocation models do not account for new systemic risks. Consequently, the vast majority of wealth remains concentrated in financial instruments within a highly correlated system that is vulnerable to financial and systemic failures. Systemic risk cannot be insured within the system. An effective wealth preservation strategy requires the inclusion of assets that are not correlated to traditional financial instruments, do not rely on financial counter-parties and deliver geographic diversification and global liquidity. Physical Gold owned and stored outside of the financial system uniquely satisfies these criteria.
On-Going Risk Management
Evolving conditions dictate the need for on-going risk management and the ability to handle adverse developments. Physical gold ownership allows for portability, reliable execution and performance in the event of a systemic disruption.
Even though physical gold is stored outside of the financial system, it remains a highly liquid asset. All settlement of trades for cash occurs within two business days. Under systemic disruption or tail economic scenarios, physical gold can provide liquidity to maintain quality of life and the capital to opportunistically buy distressed assets.
Safe Haven Asset
In times of extreme stress and uncertainty, assets held within the financial system have often become inaccessible or subject to involuntary conversion or liquidation. Gold can be held efficiently outside the financial system.
No Inherent Counter-party Risk
Physical gold can be directly owned and cost-efficiently held in secure, segregated storage without any possibility of re-hypothecation, and therefore it is isolated and protected from financial or counter-party risk.
Flexible Exit Strategies
Gold bullion allows for flexible exit strategies. Investors can take direct possession of bullion or exit via different currencies within a two day settlement period.
Gold adds diversification benefits to a portfolio. During times of systemic stress gold has demonstrated low correlation to stocks and bonds.
Fiat Currency Alternative
Gold is global currency that governments cannot debase through printing. Gold is considered an essential monetary reserve asset by most central banks and is the only reserve asset that is no-one’s liability. This means that, unlike a currency, the value of gold cannot be affected by the economic policies of the issuing country or undermined by inflation in that country. Whereas significant value in currency must be stored within the financial system (i.e., banks), gold can be efficiently stored in secure, private facilities.
Gold typically outperforms in the event of rising inflation expectations. In inflation the price of goods and services rises versus currency or more accurately the purchasing power of currency decreases. Because gold is an asset that goes up with inflation and actually increases at several times the rate of inflation, it is an excellent hedge against inflationary shocks. An allocation to gold bullion hedges against inflation, reduces portfolio volatility and improves returns over the long term.
Gold has been and remains an important hedge against deflation and deflationary recessions and depressions. This is because it is an asset that has no corresponding liability and is an important reserve asset and globally accepted form of money with a finite supply. Gold performs well in a deflationary environment because gold has been used as money and a store of value throughout history. In deflation the price of goods and services falls versus money or more accurately the purchasing power of money increases.
Total Return Play
In modern economics, credit replaces money. When excess credit gives rise to speculative bubbles, the ultimate collapse of those bubbles leads to default which causes credit to disappear and economies to falter. Today, our global financial system is more connected and integrated than ever before and the sheer size of many corporations and banks and the huge levels of debt at all levels means that the global financial system is more at risk of contagion and a systemic crisis than ever before. The gold price stands to be the prime beneficiary of global deleveraging and risk aversion.