Gold is no safe haven – but you should still own some – MoneyWeek

I’mafanofTasker’swriting。

Heoftentalksalotofsense。

AndInormallyagreewithhim。

Ievenagreewithmanyofthepointshemakesaboutgold。

Butnotquiteallofthem…

Whyhasn’tgoldsoaredduringtheeurozonecrisis?

Ifgoldissucha‘safehaven’asset,thenwhyhasn’titrocketedduringtheeurocrisis?

Thishasbecomeoneofthekeyargumentsofgoldbears。

Andit’sonethatPeterTaskermakesinhislatestcolumnfortheFT。

“Whereisthehaventhatoffersprotectionagainsttheturbulenceofmarkets?

Guesswhat:thereisn’tone”。

He’sabsolutelyright。

Theterm‘safehaven’islazyshorthandusedtodescribeanyassetthatpeoplepileintowhentheyarefeelingscared。

Butthereisnosuchthingasaconsistently‘safe’haven。

Forexample,UKgilts,USTreasuries,andGermanbundshaveallvariouslybeendescribedas‘safehavens’。

Buttheyareamongthemostovervaluedassetsontheplanet。

Andtheirpricesfluctuateonadailybasis,sotheydon’tofferanysortofguaranteedprotectionagainstcapitalloss。

Seealso

Abeginnersguidetoinvestingingold

Fromcoins,bullionandbars,tostocksandETFs,MoneyWeeksguidetothebasicsofinvestingingold。

Andlet’sbeveryclear–goldisn’ta‘safehaven’either。

Trytellinganyonewhoboughtitin1980thatgoldprotectsthevalueofyourmoney,andyou’llprobablybegreetedwithasardoniclaugh。

Itmightdosoovertheverylong-term,buta20-yearbearmarketisenoughtotestthepatienceofeventhemostardentgoldbug。

Whatmostpeopleoutsidethefinancialworldunderstandbytheword‘safe’,isthatanassetprovidesaguaranteedsafeguardagainstanominallossofcapital(ieignoringinflation)。

Theonlyassetthatdoesthatiscash。

Andunlessyoukeepitunderamattress,eventhatguaranteeisonlyasgoodasthegovernment-backeddepositinsuranceschemethatstandsbehindyourbankaccount。

Moretothepoint,itwilldonothingtoprotectyouagainstcurrencydevaluation,debasement,orgeneralinflation。

Therealquestion:whyhasgoldheldupsowell?

Sowhyhasn’tgoldperformedspectacularlyduringtheeurozonecrisis?

Here’swhy。

Iftheeurozonecollapses,theoutcomethatpeoplefearmostisdeflation。

Thatexplainspartlywhysomuchmoneyhaspiledintobondsthatyieldverylittle。

Duringdeflation,cashbecomesmorevaluable。

Ifpricesarefalling,afixedamountofcashwillbuymore。

Soaslongasyou’reholdingontotherightcurrency,youcandoverywell。

Evenaminimalyieldonabondissuedbyareliablegovernment,willbeabigimprovementonthecompleteabsenceofyieldofferedbygold?

Infact,I’darguethattherealwonderisthatgoldhasheldupsowellduringtheeurozonecrisis,particularlywhenyoucompareittomostothercommodities。

Theanswertowhygoldhasheldupsowell?

Well,ifdeflationisallowedtohaveitswaywiththeeurozone,thenyoucanexpectmassdefaultsacrosstheglobe。

Thatwouldbeverybadnewsfortheglobalfinancialsystem。

Inturn,thatwouldincreasephysicalgold’sappeal,becauseit’soneofthefewassetsthatisn’tanyoneelse’sliability。

Itsvaluemayriseandfall,butitwillnevergotozero。

ThealternativeandI’dsaymorelikelyscenarioisthatwhateverliesdirectlyahead,theendgameofthiscrisisinvolvescentralbanksprintingalotmoremoney。

Again,thatscenarioisgoodnewsforgold。

Thebiggestthreattogold,asfarasIcansee,isifcentralbanksstarttohikeinterestrates。

Thattimemaynotcomeforquitesometime。

Andwhenitdoes,it’llprobablybeinresponsetorisinginflation,whichtendstobegoodnewsforgoldintheearlystagesinanycase。

Goldisnottheonlyinvestment–butyoushouldholdsome

Thatdoesn’tmeanthatgoldistheonlythingthatshouldbesittinginyourportfolio。

Itwouldbestupidtohave100%ofyourmoneyingold,justasitwouldbestupidtohaveallofyourmoneyinanysingleassetclass。

Andgoldiscertainlynotascheapasitwas10or11yearsago,whenitwasself-evidentlyundervalued。

AsTaskerputsit,“someassetsoffermorevaluethanothers”。

HecitesstocksinJapanandEurope,bothofwhichI’dhappilyaddtomyportfoliojustnow。

YoucanreadmoreaboutwaystoplaycheapEuropeanmarketsinthisweek’sissueofMoneyWeekmagazine,whichcomesoutonFriday。

(Ifyou’renotalreadyasubscriber,youcangetyourfirstthreeissuesfreehere。

)

TaskeralsonotesthatUShousepricesareverylowrelativetothepriceofgold。

Again,ifyou’regoingtoconsiderbuyingpropertysomewhereintheworld,I’dagreethattheUSlooksmorepromisingthanmostplaces(asourregularcontributorJamesFergusondiscussedinMoneyWeekearlierthisyear:Aonce-in-a-generationopportunitytopickupprimeUSrealestate)。

ButI’dalsohangontogold。

Myviewisthat5-10%isaboutright,butyourexactallocationwouldcomedowntoyourowncircumstances。

It’stheretoprotectyouagainstextremefinancialrisks,andthere’sstillagoodchancethatwe’llseemoreofthoseinthenearfuture。

Also,I’dkeepacloseeyeonthegoldpriceoverthecomingmonths。

AsmycolleagueDominicFrisbyhaspointedoutonseveraloccasions,gold’sbullmarkethasfollowedafairlyreliablepatternofhittingnewhighs,thenconsolidatingforperiodsofaround18months。

Thelastpeakcameinlatesummerof2011。

Sowe’renotfaroffthe18-monthmarknow。

Ifthepatternholds,2013couldbeaveryprofitableyearforinvestorsingold。

Onthatpoint,werecentlyranacoverstoryoninvestingingoldminers。

ThewriterSimonPopplewillbelaunchingapreciousmetalsminingnewslettershortly–lookoutforit。

Inthemeantime,youcanreadhispiecehere:Goldstilllooksgood–butminerslookevenbetter。

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