“You have to choose between trusting to the natural stability of gold and the natural stability of the honesty and intelligence of the members of the government. And, with due respect for these gentlemen, I advise you, as long as the capitalist system lasts, to vote for gold.”
Many people would agree with George Bernard Shaw, especially when we survey the economic problems that politicians have contributed to over the years.
What the famous writer and philosopher was alluding to is gold’s safe haven status throughout history. Paper currency collapses and stock, bond and property market crashes are common throughout history – much more common than many people realise.
Gold has been the primary asset that has protected people from natural disasters, war, recession and depressions.
History clearly shows this. There have been numerous stock and property bubbles in the last 100 years. When they collapsed those that did not have all their eggs in the one basket, had diversified and owned some gold protected and indeed grew their wealth.
More than 30 paper currencies have collapsed in hyperinflation since 1914. More recent examples of this are the collapse of the Soviet Union, in Argentina and in the bread basket of Africa, Zimbabwe as recently as 2007. Gold is financial insurance in an uncertain political and economic world.
Besides history, there is also a significant body of empirical evidence in the form of academic research that shows that gold is an important diversification for investors.
Indeed, Dr Brian Lucey and Dr Constantin Gurdgiev have found that gold is “a hedging instrument and a safe haven asset.” The respected academics recently completed an academic paper on gold which was presented at a conference hosted by the Bank for International Settlements (BIS), the ECB and the World Bank.
The price of gold typically moves inversely to other asset classes, thus giving balance and protection in an uncertain economic world. Over the long run, gold has an excellent track record in maintaining its purchasing power relative to currencies and other assets. In a world of near infinite paper and electronic euro, dollar and pound currency creation, gold is again becoming important as a finite currency and as a monetary and safe haven asset.
Prudent advisers recommend that some 10% of one’s wealth should be in physical gold. Not paper gold or derivatives that have significant default risk and can become worthless but actual bullion coins and bars.
It remains the ultimate safe haven asset and will protect from the considerable geopolitical and macroeconomic risks of today including the risk of a U.S. and global recession, terrorism and war in the Middle East or between NATO and a newly formidable Russia.
Gold will again act as a hedging instrument and safe haven asset when it is needed in the coming months and years.