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!!! 🙂

014-2020 Currency Wars

Title: Currency Wars (The making of the next Global Crises)

Author: James Rickards

This is my second book with this author (the first being “Aftermath”), and just as with the first book, he has given me more to think about regarding our finance system.

Our currency system, exchange of paper money in return for goods or services, is based on the mutual trust we have that the paper money is representative of value. As long as we maintain that trust in the currency, the society can continue to function the way it currently does. But, once we lose that trust, people make a run for the banks to get out as much as possible.

In the kingdoms of the past our currency system was made up of coins, which were minted from real commodities. Additionally, the coin that was issued by the kingdom had the assurance from the king that the coin would be accepted as legal tender to take part in trade in that kingdom. Then, the invention from Asia was brought to the West, paper money, which proved much easier to carry around, and therefore a lighter coinpurse. However, that paper only had value because it must have been backed by something that held value in such a kingdom, this was gold. For a fixed amount of paper you could buy a specified amount of gold, or other commidity.

Therefore, as long as we had trust that for the paper money we used there was gold for which it could be exchanged, a simpler currency system could be used in daily circulation.

Entry, the chapters to the book.

Prior to the First World War, different countries had set a fixed exchange rate. One was allowed to exchange currency for a certain amount of gold. Every nation had fixed a different rate to gold, and thereby indirectly created an exchange rate between different currencies. Then, the war broke out and countries took out loans to finance the war from their side.

After the wars ended via an armistice, the winners wanted the losing countries to paid for all their debts which they had incurred to run the war. England and France were eyeing the erves of the losing country, whilst America wanted them to be afforded the chance to repay reparation costs through future economic output returns. Thereby, the losers would be able to build up their economy again, and also be able to repay reparation costs, rather than losing their ability to generate any economic output at all, and be in ruin.

Germany then underwent a currency devaluation (ie. making the purchasing power of other countries in Germany stroonger) to become an attractive country to manufacture goods. France followed soon after, since they wanted to regain the competitive advantage that Germany had gained, and afterwards countries like England and America experienced their Great Depression. The purchasing power of the currencies dropped significantly, and many people lost savings and were financially ruined.

Throughout all this Germany became stronger again, and a strong economic player in the world trade. Sadly, the country engaged in war again in 1939, and led to World War 2.

After the end of the second war, the different countries came together and decided that all the different currencies of the different countries should be pegged to one currency, the strongest currency, which had value for the other currencies since that currency was backed by gold reserves. This was settled in the Bretton Woods conference, where the US Dollar was then set as the pegged currency.

Since that day, the US Dollar was backed by gold, and other countries that traded with the US Dollar in their transactions had the assurance that for every Dollar in circulation there is a certain amount of gold stored somewhere. Some countries, however, became stronger than after the war had ended, and decided to build up their gold reserves. It became so bad that in 1971 the then President of America decided to take the US Dollar off the gold standard, and no one was allowed to exchange their dollars for physical gold. This was done in order to preseve the gold levels in the country. Further, America wanted to devalue their currency against other countries, because it felt the Dollar was overvalued, which would make other suppliers in other countries cheaper to buy from, and result in loss of jobs to America. By devaluing the US Dollar, the purchasing power was dropped in relation to other countries, in order to improve its competitiveness against other trading countries.

Another way the purchasing power of the US Dollar was dropped was when during the Financial Crash (2007-2009) the Federal Reserve printed money from thin air, which should be injected into the economy to get trade going again (called Quantitative Easing – QE). Since more paper money was in supply the demand for it wasn’t as strong as when there were fewer, so the price to acquire a Dollar dropped.

Now, you may want to ask me, when am i will come around to write the review on the book. Well, what I have recounted above is what the book is about. It elaborates the hsitory of the US Dollar in the 20th century, and how volatile paper currency is as money. Our paper money can have one value associated with it one day, and the next lose it, which means saving all our money in the bank is not necessarily equivalent to becoming rich, or ensuring ones financial future. Our modern day currency is so susceptible to lose its value that we actually need to consider more than one way to maintain wealth, and not through saving money in the bank only.

Summary:

The book gave me really more perspective on the matter of currency, and how important it is not to rely on something like paper to sustain our future retirement. We need to become financially educated and never rely on another person to take care of us, but work and build our asset columns. Book takes my rating of 4.3/5

I hope that when you decide to read this book one day you will also get a shock, and wake up to realize just how volatile our modern-day currencies are, and that more than savings in the bank will do the job of securing a financially securer future.

Happy future reading!