Here at Noble Gold we spend our time studying the markets – stocks, bonds, commodities, currencies – you name it …
We see so many statistics, graphs, charts and illustrations, we tend to become a bit detached about them all. They are just tools we use. We understand them. We understand their implications, and projections. We know how they will impact our clients, and we advise accordingly. Like a new car, after a few weeks, you don’t even notice, you just drive it.
But – every once in awhile something will come along which knocks us out cold.
The graph above, did exactly this!
What this graph shows, is that since the 1920s, currencies – be they dollars, marks, euros, yen, or pounds - have all, ultimately, collapsed in value against gold.
For those not versed in reading charts the yellow line represents the “value” of gold. The other lines trace the amount of gold one unit of those currencies could buy. In every single case you can see the amount of gold which can be bought for a single unit of any type of money has slumped to the point where currency has become almost worthless.
Gold, for all the arguments ranged against it - you can’t eat it, you won’t be able to sell it, it is too difficult to look after, it is not easy to split up - is the only entity to hold its value through the 20th-century and into the 21st …
This makes it very special indeed - and we want to have a quick look at why everybody should own some gold.
A Recognized Store of Value
Gold and silver coins have been used for thousands of years as money. Not a day goes by without, somewhere in the world, somebody stumbling across a coin buried in a field, a ring found behind the wall of an old house, or recently this …
Find a stash of old paper currency from the 1930s and it’s true value will be in cents, rather than dollars.
Find a stash of old gold coins from the 1930s and their true value will be thousands of dollars rather than cents.
This is the difference.
In order to function, any kind of “ money” has to fulfill three basic requirements:
- It must act as a medium of exchange
- It must be a unit of account
- It must be a store of value
If you take these three, you can see, the old paper currency is no longer a medium of exchange. Banknotes are changed on a regular basis because they wear out or become obsolete. Central banks in most countries will exchange them on a like-for-like basis but imagine the effects of inflation on a banknote from the 1930s.
This is where gold scores on all three points. As a medium of exchange, it is a tangible and recognizable entity. As a unit of account - in gold’s case, weight - it is a universal measure which is used throughout the world. Finally, as a store of value, gold is exchangeable for its worth, at the exact moment it is sold. In this way its purchasing power is preserved over time.
You will notice, on the chart above, the purchasing power of the dollar mirrors that of gold right through to the 1930s. At this point, as shown by our red arrow, Roosevelt decided to end the gold standard. This broke the relationship between gold and the dollar and led to the two going in entirely separate directions, in terms of value.
Going back to our three points above, the one which is broken by this action of separating gold from money, is the ability of the banknote to be a unit of account.
Sure, the banknote has a nominal value printed on it, but this is now just a piece of paper, like any other. The bill’s value is now a perceived one – it has no backup by anything more substantial than a promise from the government.
The other interesting aspect of this, of course, is the government can print as many of these bills as it wants - and the more bills it prints - the less the currency is actually “worth.” This is the very definition of inflation in monetary terms.
Staggeringly, in the 220 year period shown, the dollar lost over 98% of its purchasing power.
In the same period, gold held steady with only a slight wobble here and there.
Gold - Your Very Own Hedge Fund
A very important reason for holding gold is to offer downside protection against falling stocks and bonds.
Although it can never guarantee "replacing" the losses completely, gold can go some way towards mitigating the effects of volatility in the market. The very act of diversifying an investment portfolio and including precious metals allows this.
The most important aspect of gold acting as a hedge can be seen when the global monetary system is looked at. Because central banks have exercised monetary policies which are expansionary, during the past couple of decades, the debts built up by these banks have reached the point where they are likely to be unsustainable. These debts are based on the “promises” of governments to be able to pay them back.
As long as the creditor countries are confident the debtor countries can pay this back - will not devalue their currency, or increase inflation - the system just rolls along. Everybody kids themselves the situation is fine, and the debt just continues to build and build and build.
Total credit in the U.S. was $63.4 trillion in 2016. This is over 200 times the known US gold reserves backing it, and 17 times the monetary base. And this is just one country. Ours.
Most right thinking people know bankruptcy and insolvency are on the horizon for the majority of central banks. Governments are also well aware of this, but are reluctant to do anything about it for fear of losing votes domestically.
At times of financial distress, recession, and credit crises, the gold price has always risen- this has led to its being seen as a "safe haven." There is no reason to suppose this will not be the case in the event of future problems. In this way, gold can certainly be seen as a kind of insurance policy. On a day-to-day basis this policy may not give you much of a return, if any, but when everything goes horribly wrong – it pays out.
The real likelihood of needing "gold insurance" soon is increasing by the day. This is the U.S. debt clock. It can be seen from this how unsustainable these levels of spending are.
Is Gold Really Undervalued?
Gold is quite odd. It is not really a productive asset in the sense of most investment vehicles. It offers neither capital appreciation or yield. The only thing which works in gold’s favour is basic supply and demand – that is the demand for the gold exceeding the existing stock both above, and below, the ground.
We can be fairly certain, from World Gold Council figures, a total of 186,700 tons of gold has ever been mined up to 2016. This is still an estimate – albeit a fairly accurate one. At the same time the proven gold reserves thought to be available, by the US Geological Survey, estimates there to be about 52,000 tons still to be mined.
In case you are having difficulty visualising what 186,700 tons of gold looks like, here is an illustration based on the Statue of Liberty. Given this is the total of all gold mined, you can see that, physically, there is not a lot of it. It works out to about .8 of an ounce for each person on the planet.
Gold production is now thought to have peaked. This is because the easily accessible ore, and veins have all been reached. The remaining 52,000 tons is more difficult to get to. Combine this with the fact that mining has become more environmentally sensitive, and it is easy to see why supply will easily be taken up by demand.
The major use of gold is for jewellery. This amounts to over 2000 tons per year and represents half of the total demand for gold overall, the rest being made up of electronic, dental, and other industrial uses. India and China have the biggest demand for gold. The remaining 1500 tons is taken up by investment demand by both central banks and private investors.
The average cost of production of gold is $700 an ounce. This assumes a balance of supply and demand. As demand goes up, the price goes up accordingly. The inverse is also true of course.
This makes 186,700 tons of gold worth about $7.1 trillion at today's gold price.
The total of the world's pension fund assets was just over $36 trillion in 2016, add to this $7.4 trillion in sovereign wealth funds globally, and you reach $43.4 trillion.
Imagine if it just these two investment categories allocated just 1% to gold, that would be a demand of 12,000 tons. This is more than four times the annual output - about 1/15 of the total gold ever mined.
If we went back to the gold standard tomorrow, and the U.S. used gold to support the dollar, the gold price would need to be over $6000 an ounce.
These figures are both confusing and mind blowing - but we are using them simply to illustrate that the potential for gold to explode in price is not based on outlandish or exceptional projections. Any move, no matter how small, will be greatly magnified - simply because they are not making gold any more (well, not as much as they used to).
So Why Gold – Really?
In a nutshell, paper assets are just a promise. This promise is based on so many variables and so many possibles the investment vehicle itself becomes a risk, even before the “asset” it represents. For example, a stock’s value is based on the performance of a company. But the value of the paper asset itself may be affected by economic conditions which have nothing to do with the way in which that particular company is performing. It just becomes “financial collateral damage.”
This is true of bonds, EFT, and other paper assets and derivatives of them.
It is because of this that gold should be considered as part of your overall asset allocation in today’s investment plans. We are not suggesting for one second you should plough all your money into precious metals. This would be far too dangerous.
Remember,we are not using gold as a normal investment asset. It is being used to store wealth and at the same time protect that wealths value from inflation. It is also being used as an insurance policy against the failure of the global monetary system.
We strongly advocate that the gold allocation you choose be in physical metal which is assayed, stored securely, and is either available, or deliverable, on demand.
This is where reliable, secure, storage facilities come into play. These should always be a consideration when weighing up the costs involved in precious metals.
In closing, we would just like to quote Henry Ford, he said,
“It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.”
And this - is why you need gold in your investment mix …