The Gold Refinement
A physical asset that is accumulated, rather than consumed.
Introduction
Gold has proven itself over thousands of generations as a currency that retains its value. As a result, investors look to gold as a safe haven during times of political and economic uncertainty and as a hedge against inflation, a declining U.S. dollar and low interest rates.
Gold is a physical asset that is accumulated, rather than consumed. And being virtually indestructible, virtually all the gold that has ever been mined still exists today. Making it viewed by many around the world as a store of value.
Like most investments, an investment in gold should form part of a wider portfolio.
While gold will move with stocks, bonds and real-estate price movements. It is for the most part uncorrelated. Making it a good storage of wealth and a diversifying investment.
The reason Gold has stood the test of time is because it ticks all the boxes needed to make it a great currency. Gold is:
- Durable (not easy to destroy);
- Acceptable (something that other individuals will take);
- Portable (ability to carry easily);
- Divisible (able to be split without destroying value);
- Homogeneous (consistent);
- Identifiable (easily recognised/measured);
- Retain value (rare/scarce);
Why
Gold is seen as a hedge against a declining U.S. dollar and rising inflation. When investors realize that their money is losing value with rising inflation and/or low interest rates, they start looking for physical assets that have traditionally maintained their value over time i.e. gold and other physical commodities.
Purchase gold of you think real interest rates will remain low or the economy is looking like our has made a correction.
Risk
There are four main risks to owning gold. These risk are not unique to gold and are similar to any other investment. Those risks being:
- Rising interest rates;
- Liquidity;
- Recognition;
- Premium;
Rising interest rates: as interest rates increase, gold becomes less attractive. Because you can achieve better returns by putting your money into a bank account. To mitigate this risk, diversify your portfolio by holding a position in cash. As cash will perform best in rising interest rates. Watch for interest rates going above 6% the average annual return on gold, making it a trigger point to review any position in gold and perhaps sell that position down.
Liquidity: like most things gold is only worth what someone else is willing to pay for it at the time you need to sell it – i.e. how much will a buyer be willing pay for each piece relative to my target sale price and will a buyer be easily found? To mitigate this risk, hold a mix of larger and smaller bullion.
Larger bullion helps reduce the premium (difference between spot price and purchase price) asked. While smaller bullion is more liquid (easier to find a buyer).
For maximum liquidity buy bars and ingots that are 2oz or less. Aim for 10g to 1/2oz where possible, for reasonable premiums.
Another mitigation against liquidity, is the purchase of gold ETFS.
Recognition: will a buyer easily recognise the brand of bullion? I.e. will they trust the purity? To mitigate this risk, purchase PAMP accredited bars that are globally recognised and readily exchanged.
Premium: will I get the premium, the difference between the price paid and the market spot price, back when reselling? Generally speaking the smaller the product purchased, the larger the premium added. To mitigate this risk, balance the liquidity of smaller products against the lower premiums of larger products that maybe harder to liquefy (move into cash). Holding a mix sizes.
Purchase Options
In Australia you will pay a different price then our American counterparts, as the local price is a derivative of the US spot price and AUD/USD exchange rate. For this reason Gold and Silver purchased locally is both a play on the US spot price of the metal as well as a currency play (what the AUD will do relative to the USD).
There are two main ways to get exposure to gold. Physical and paper gold.
Physical gold is what has proven itself over time, but like stuffing cash in the mattress, you need to consider how to store physical gold. Are going to store it: in a safety deposit box; allocated in a corporate safe; in a home installed safe; or even buried;
Whether you choose to invest in physical gold and how you store it will depend on personal situation and how you few the world. If you think the government is going to collapse or come for your wealth, you might put it in a safe at home. Worried your house might burn down, buried it in the back yard. Worried you might die with your secret gold stash buried in the back yard for the next person to put a garden in to find. Then perhaps a safety deposit box.
With paper gold you can get exposure to gold through Electron Traded Funds (ETFs), a managed fund or gold associated companies on the stock exchanged. In the end, what makes a currency valuable is the confidence that you can exchange in the future. However, you have the risk that organisation backing your paper gold goes under and you are fighting for your asset.