Thursday, July 26, 2012

Hang On To Gold

By Tim Price of  PFP Group:

Equities, of course, are only part of the bigger picture. Gold remains attractive. Although it has had a less-than-stellar year so far, I’m willing to be patient. Consider what asset manager Simon Mikhailovich said during a recent interview with US financial newspaper Barron’s.

When asked if he could imagine another Lehman Brothers-style event, he responded: "It's just a matter of time. This financial system is completely unsustainable… The ability of governments to sustain the unsustainable ultimately rests on their ability to maintain faith in their creditworthiness...

“If this devaluation of financial assets proceeds apace and the moment of clarity comes for many investors in the West who realise they need to diversify into assets that can protect against devaluation, demand for physical gold has the potential to rise dramatically."

The beauty of gold is that it offers a chance to protect against both deflation and inflation. It's difficult to point to gold's credentials as a deflationary hedge because prior historic periods of deflation occurred when its price was fixed. The most recent deflationary period was limited to Japan, at a time when the rest of the world economy was booming.

But as deflation (in financial asset terms) is associated with acute financial stress, it seems reasonable to expect gold to provide some diversifying relief from that stress. Particularly because (unlike sovereign debt, for example) it is nobody else's liability.

And as an inflationary hedge, it is worth noting that gold has remained a store of value for literally thousands of years.

Gold is also now getting attention from the unlikeliest of sources. Bond fund manager Bill Gross of Pimco recently wrote: "As [investors] question the value of much of the $200 trillion which comprises our current [monetary] system, they move marginally elsewhere – to real assets such as land, gold and tangible things, or to cash and a figurative mattress where at least their money is readily accessible."

In short, investors are faced with a choice between vast abundance (in paper assets and all things debt-like), and genuine scarcity (tangible and real assets, especially gold). In a deleveraging world and in light of the ongoing financial crisis, it makes sense to vote for scarcity. 

Tim Price

Tim Price is director of investment at PFP Group. He also writes The Price Report newsletter. To find out more about Tim’s current views on the eurozone and the wider markets, watch this presentation.

Gold in New Zealand dollars: $0000.00 per oz
Previous all-time high: $2311.02 per oz (15 Nov, 2011)

Silver in New Zealand dollars: $00.00 per oz
Previous all-time high: $59.19 per oz (30 Apr, 2011)
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