028-2020 The new case for Gold

Title: The New Case for Gold

Author: James Rickards

With all the investment strategies that are out there, it can be quite dauting to pick one, especially since we won’t know whether it was the right strategy until we have reached the point that we will use those funds.

Some strategies focus on investments in companies (equity investments) and thus rely on their future earnings potential, whereas others consist of a combination of different forms of investments (equity, bonds, property, minerals, etc.) which provide more assurance for cash flow than growth. Even when one goes to a broker, they will present you with all their products, and try and find out which one would be best suited to your needs. However, whether that will result in the best option (based on how the future develops) is only something that we can see in the future.

I have read a few different articles and different books where the authors give out that their investment strategy is best because:

  • the optimist – the economy will be good in the future, therefore investing in companies is the best alternative
  • the pessimist – the economy will not be as good in the future, therefore you need to invest in assets that will preserve your wealth the best way
  • the diversifyer – to get the best of both possible outcomes, you should invest in companies and wealth-preserving assets

…which brings in more uncertainty for us on how to invest our funds since even the experts have different opinions of the same economy.

The advice I can give is the following:

  • don’t blindly rely on the expert, because whichever investment package you take, they will earn a commission
  • determine what your current financial situation is (ie. what are your assets, your debts, your earnings)
  • determine what your financial goals are (ie. new car in xx years, save money for child’s education in xx years, save additional money for retirement in xx years, buy a property to earn additional income for retirement in xx years, etc.)
  • based on your financial situation and your financial goals, establish how much money you have available to invest (that you could lose to investments and wouldn’t hit you strongly)
  • establish how you believe the economy is doing (even asking a friend) and where you feel the economy will be in the future
  • determine what you risk tolerance is to investments….how willing are you to invest in riskier investments than in less risky investments
  • then, read up on the different forms of investment out there (or let the financial advisor inform you) so that when you choose an investment you know what assets go into the package (and their corresponding risk level)
  • consider other things to think about as well

If we come back to the book, the author is an advocate for including Gold in your portfolio (not as the majority invested unit, but a small portion of your investments). The argument is broken down into the following chapters:

  1. Gold and the Federal Reserve (US central bank)
    • The central bank of a country is responsible to issue the locally accepted paper-based fiat money
    • When money was taken off the Gold Standard (ie. paper money is no longer backed by Gold) it became a fiat currency
    • Fiat currency has the value associated with it so long people have faith that there is value in the currency. Once people lose faith in a currency (and the economy) the value of the currency drops
    • Gold won’t be affected by this since the central banks don’t have influence over the physical commodity
  2. Gold is Money
    • Money is defined to meet the following three requirements:
      • Medium of exchange
      • Store of value
      • Unit of account
  3. Gold is Insurance
    • Gold is a scarce commodity that is accepted by multiple countries world-wide to have value, and therefore is insurance against the failure of your own countries economic failure
  4. Gold is Constant
    • Gold is tangible and not non-tangible (ie. paper-based fiat currency or digital currency that could be erased) and therefore cannot be lost as digital currency that can be stolen or erased
  5. Gold is Resilient

The role that Gold should play in your portfolio amounts to 10% of your investable assets.

  • 10% since it is better to have your wealth spread in different segments so that one is covered for different aspects in the economy, and not 100% in one
  • investable assets refers to the money that you can afford to invest, which loss won’t result in significant financial difficulty should it be lost

Personally, I’d like to believe that our future economies will be even greater where we can utilize technology to an even greater extent and much more efficiently, and therefore not of economic failure.

Summary:

The book makes good arguments why gold provides more financial security, because it holds value world-wide and its value is not restricted p/country. It provides clear guidance that should someone wish to include this into their portfolio, they should only include a small portion, and only with funds that they can afford to invest. The book delivers on its promise to argument for Gold, but won’t necessarily help an investor to build their investment portfolio with other assets, because those aren’t discussed, which could have been an interesting chapter on its own. The book is thus rated as 3.4/5

Keep well!!! 🙂

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