Investors have historically turned to tangible investments such as gold bullion bars to protect their wealth and secure their
purchasing power over long periods of time.
Gold effectively helps manage risk in a portfolio, not only by means of increasing risk-adjusted returns, but also by reducing expected losses incurred in extreme circumstances. Such tail-risk events can have a devastating effect on an investor’s capital. On one hand, short and medium term holders can take advantage of gold’s unique correlation to other assets to achieve better returns during times of turmoil. This is especially true given that gold’s correlation tends to change in a way that benefits investors who hold it within their portfolios. On the other hand, by including gold in their portfolios, long term holders can manage risk without necessarily sacrificing much sought after returns.
Analysis suggests that even relatively small allocations to gold, ranging from 3 to 10 percent, can have a positive impact on the structure of a portfolio. It finds that, on average, such allocations can reduce the VaR of a portfolio, while maintaining a similar return profile to equivalent portfolios that do not include gold.
There is a strong case for gold to be allocated as an asset class on its own merits. It is part commodity, part luxury consumption good, part financial asset and part monetary asset, and as such, its price does not always behave like other asset classes and especially not other commodities.
Finally, while the key benefits to investing in gold concentrate on risk in the form of tail-risk and volatility, gold has other unique risk-related attributes that make it very useful in periods of financial distress. For example, the gold market is highly liquid and many gold bullion investments have neither credit nor counterparty risk.
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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 of society and increasingly with governments means that the global financial system is more at risk of contagion and a systemic crisis than before.
What began as a financial crisis in 2007- 2008 has become a global systemic and economic problem. Toxic financial instruments and huge liabilities that crippled banks and financial institutions have now become nationalized by a process of unprecedented government and central bank intervention. Rather than allowing the market to purge itself, governments poured trillions of dollars of taxpayer money into this highly unbalanced system. Central Banks and governments implemented massive policy responses, seemingly overnight, that have effectively blurred the necessary distinction between the defining institutions of our monetary system: government and banking. As Central Banks pushed interest rates to zero and provided colossal liquidity injections into the banking system, governments simultaneously intensified spending. In an effort to save the financial system, monetary and fiscal restraint has been abandoned.
We now find ourselves in a catch 22 scenario where the system and the products of the system are at odds with each other. Either’s survival requires the destruction of the other. Looking ahead, only those people who have secured assets outside of the system will enjoy the full value of their wealth.
Gold, unlike corporations, banks and indeed governments cannot go bankrupt. While gold rises and falls in value like other currencies and assets, its scarcity means that it always retains some value.
Gold has a track record of holding its real value over the centuries. Since gold is no-one’s liability, it cannot be repudiated and holding it is a safeguard against potential unforeseen crises such as an international monetary crisis or a systemic crash. Gold also brings much needed diversity to investor, pension and central bank portfolios due to its low correlation with key currencies and its strong inverse correlation with the US dollar.
Gold bullion that is owned outright and not kept within the financial system is a good hedge against systemic risk. Unlike property and other assets that are normally financed through debt (and are therefore often liquidated in order to pay off the debt or liability), gold bullion is no one else’s liability.
As a rule, gold shows no statistically significant correlations with mainstream asset classes. However, there is evidence that when equities are under stress, in other words when shares are falling rapidly in value, an inverse correlation can develop between gold and equities. And this aspect of gold’s behavior runs directly counter to the way other asset classes perform under duress. Therefore, gold is an important part of a diversified investment portfolio because its price increases in response to events that erode the value of traditional paper assets like stocks, bonds and cash.
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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 counterparties and deliver geographic diversification and global liquidity. Physical Gold owned and stored outside of the financial system uniquely satisfies these criteria.
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Most nations around the world (particularly the G7) are creating money in an attempt to depreciate their currencies. In a global economy, no country can effectively compete in the marketplace of producing goods and services if their currency is over-priced relative to their competitors. Given this reality, all are engaging in competitive currency devaluations.
Over the next few years, Central Banks led by the Federal Reserve will intensify their money creation. Quantitative easing and monetization of debt are the Fed’s only options. When so much new money is created in such a short time and under such weak economic conditions that the total supply of money rises rapidly, it distorts price signals, brings about the undeserved transfer of wealth to the first receivers of the new money, and depletes real savings. In the US, there has been enough growth in the money supply in the past 5 years to do substantial damage to the economy. And yet, the Federal Reserve and the government are attempting to overcome the adverse consequences of monetary inflation by creating even more money.
Foreign Central Banks and Sovereign Wealth Funds have taken notice as they seek diversification away from the dollar toward direct ownership of mineral resources, industrial companies, and other equity investments rather than Federal Reserve liabilities (dollars). As this easy monetary policy continues, the dollar’s inflation problem is set to become even more problematic in the years ahead. Gold is the premier store of wealth that the world has known for the past 3-4 thousand years precisely because it is, first of all, money. As money, its primary function is the preservation of wealth. When a currency depreciates, the main beneficiary will be the only real money which can’t be printed and which has no debts attached to it, namely gold.
Perhaps one of the most harrowing facts of our current situation is the potential for the simultaneous combination of monetary or price inflation (the destruction of the purchasing power of our money) with asset deflation (the destruction of the purchasing power of our assets). The collapse in the value of the currency and the value of assets constitutes a massive redistribution and destruction of wealth. Perversely, the segments of the population most affected by this destruction of wealth (creation of dollars without the ability to pay for those dollars) are retirees and those living on fixed income.
The magnitude of the worldwide financial trouble is astounding. The US, a nation not long ago known as the largest creditor nation has become the largest debtor nation. The US Government’s response to the situation, though predictable, is disturbing. Through an unprecedented and ever expanding monetary inflation, we are guaranteed an equivalent reduction in purchasing power (rampant price inflation) and asset devaluation.
An inflation hedge is an asset that loses little value in periods of rising prices. Thus, it holds its value and its purchasing power during inflation. Real assets have intrinsic value. They have value of their own. People value them for their direct or indirect usefulness. Inflation does not erode a real asset’s value. Thus, gold is the premier inflation hedge.
Statistics have shown that gold provides excellent diversification opportunities as it is not correlated with returns from mainstream assets. A strategically diversified portfolio does not only contain a range of different asset types such as stocks and bonds, but should also have assets that have low correlation with one another.
Asset allocation is an important aspect of any investment strategy. By balancing asset classes of different correlations, investors hope to maximize returns and minimize risk. However, while many investors may believe that their portfolios are adequately diversified, they typically contain only three asset classes – stocks, bonds and cash.
Investing in gold neutralizes the volatility of traditional asset classes and attains a more balanced and non-correlated portfolio of investments. Portfolios that contain gold are generally more robust and better able to cope with market uncertainties and volatility than those that do not.
Gold offers enhanced diversification opportunities relative to many alternative assets. Independent studies have shown that while alternative assets and traditional diversifiers often fail during times of market stress or instability, even a small allocation to gold may significantly improve the consistency of portfolio performance during both stable and unstable financial periods.
Our customers often invest in gold and silver as a form of saving and wealth preservation. They view their bullion assets in their Clear Title Account as an alternative to cash in a bank account. The merit of this alternative form of real money is that it re-introduces the timeless wisdom of understanding value in terms of purchasing power. Additionally, they can log in to their Clear Title Account regularly to monitor their gold and silver, and add funds whenever they want to increase their bullion holdings.
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Demand for gold is far outpacing supply. The supply of gold mined from the earth peaked in 2000-2001 and appears to be in a secular decline. Interestingly, even higher gold prices have not induced the expected response of higher mined supply.
2009 marked a momentous shift in Central Bank’s and Sovereign Wealth Fund’s treatment of gold. For the first time in decades, they emerged as a net source of demand—rather than supply—in the gold market. Large US creditors such as China, Japan, Russia, India, and the oil producing nations have been quietly diversifying out of US dollars and adding to their gold reserves. Looking forward, this fundamental shift should have a potent impact on the price of gold for many years to come.
Furthermore, the amount of physical gold being taken off the market by investors motivated by wealth preservation has increased exponentially. The ongoing flow of gold to private accounts may reduce the ability of above-ground gold stocks to meet increases in demand even at current prices.
The volume of gold traded through derivatives markets is a massive multiple of the underlying supply of physical gold available. As Central Banks and Sovereign Wealth Funds begin to step back from the gold market as providers of liquidity and investors store physical gold outside of the financial system the potential for a short squeeze in the gold market becomes ever more probable. In such a scenario, the price of physical gold will adjust to the point where supply and demand are once again in balance. The price mechanism ensures that supply equals demand, as is the case with any other asset not subject to government price controls. This price adjustment will only benefit those who hold physical gold.
All investments involve an element of risk – bullion is no exception. The value of bullion is affected by many economic factors, including the current market price and the perceived scarcity of the precious metal, current demand and general market sentiment. Other factors such as the bullion futures market can affect the price of physical bullion, sometimes significantly. Because bullion can reduce as well as increase in value, an investment in bullion may not be suitable for everyone. Since all investments, including bullion can decline in value, you should have a good understanding of the precious metals markets, and have adequate cash reserves before considering an investment in physical bullion.
With many bullion equity and investment products, the shareholder owns a beneficial interest (or shares) in a company, investment trust or equity, which in turn owns physical bullion. The value of the shareholder/investor’s shares is determined by the value and security of the company’s bullion holdings. Owning shares or a beneficial interest in a company is not the same as OUTRIGHT ownership of physical gold and/or silver.
Strategic Gold’s accountholders have DIRECT, COMPLETE and CLEAR TITLE to an actual and allocated amount of specific physical bullion.