Throughout history no paper currency has survived in its original form. Paper currencies are normally inflated away until they are worthless.
The purchasing power of the US dollar has declined by 90% since 1950. The situation is the same for most currencies.
When governments come under financial pressure they can never resist printing money to pay for debts, be they war debts or just excessive spending.
Gold is the only currency which has no liability attached to it.
So far no paper currency has survived intact over a longer period whilst gold has represented real money for several thousand years.
When paper money fails investors who own gold still have a currency which holds its value despite the fact that banks may be bankrupt.
Iceland is a recent example of how paper money can lose its value overnight. With the massive debt levels and money printing in many countries including the USA and the UK the risk of a similar default in other countries is very high.
Gold has at all times represented real wealth as well as being a medium of exchange. “Old money” has always maintained a percentage of its wealth in gold since the specific characteristics of gold make it probably the safest and most attractive investment for storing and preserving wealth.
Gold stored outside the banking system should be the foundation of the wealth pyramid for high net worth individuals.
Therefore, physical gold or silver should not be considered as an asset which is valued or traded on a daily basis.
Over time gold has represented an excellent investment that holds its value in real terms. In particular, gold appreciates during periods of high inflation and financial instability. As there is a limited supply of gold it cannot be printed to finance the deficit spending of governments.
Gold can act as a critical hedge both against inflation and a deflationary financial collapse. The world is currently facing a crisis of unprecedented proportions.
The financial system is fighting for survival and has been temporarily rescued by governments printing unlimited amounts of money.
There are only two possible consequences of these actions:
Both of these outcomes will be extremely bullish for gold, which always benefits from money printing and high inflation.
In the Weimar Republic in the early 1920’s gold went from DMark 100 per ounce to Dmark 100 trillion.
In the case of a deflationary collapse, many or perhaps most banks will fail whilst gold (stored outside the banking system) will be the only safe money.
The ‘peak’ mining production year was 2014 at 2,990 tons. That would put a total value of all gold produced that year at $108 billion.
Compared with an ‘official’ investment market of around $150 trillion, the gold market is minuscule at just 0.7%.
The entire gold production is comfortably absorbed and additional demand from even a tiny reallocation of investments into the gold market, by pension funds for instance, could not be met with equal supply. The gold price would soar.
From 2015 onward Gold production is likely to be stagnant as there are no major mines coming on stream.
In addition, central banks and bullion banks have very low stocks of physical gold. This limits their ability to manipulate gold in the paper market.
As investors realise that sellers of paper gold will not be able to deliver physical gold, a sustained panic buying of physical and at much higher prices could quickly materialize.
Like most investments gold moves in cycles against the major currencies of the world. Although the long term trend has shown a strong upward slope, there are times when gold spends long periods correcting a previous advance. In the long term gold has been keeping pace with stock markets, but at certain times it outperforms substantially. Since 1999, the Dow Jones has declined over 2/3rd against gold.
Other stock markets show similar substantial under-performance in relation to gold in the last 12 years.
Since 2001 gold has an outstanding global performance and in fact showed one of the best returns of any asset class during the past 15 years.
Especially if one looks at the performance against most ‘weaker’ currencies around the globe. Gold should not be measured on a daily basis.
Instead, it should be considered as a long-term core holding representing the foundation of the wealth pyramid.