The Gut-Level "Delusion" of Gold

By: Adrian_Ash

What could be more rational amid this financial crisis than choosing to buy gold...?

THANKS TO late-2011's truly miserable outlook, there are now more bullish gold-price forecasts to choose from than Heinz varieties. UBS sees a 2012 average of $2075 per ounce. Nearer $4000 an ounce would be "fair value" today reckons Paul Tustain here at BullionVault. Dylan Grice at Société Générale says $10,000 isn't impossible.

Thanks also to the 21st century's bull market in gold, there are now more ways to buy gold than flavors at Baskin Robbins, too. Market-development group the World Gold Council counts 10 separate product categories. There are 45 specialist coin dealers in London alone. The growing mob of ETFs, vaulted bullion, spread betting, CFD and warrant providers only adds to the confusion of costs, pricing and risk.

Yet today's gold buyer, typically, has one simple aim – one which remains unchanged throughout history.

"I am told of [a man who] caused an Iron Chest to be brought," wrote a scribbler some 291 years ago (probably Daniel Defoe), "and put the Money in it, then drove Posts into the Ground in his Cellar, and chain'd the Iron Chest down to the Stakes, then chain'd it also to the Wall, and Barricadoed the Doors and Window of the Cellar with Iron, and all for fear, not of Thieves to steal the Money, but for fear the Money, Chest and all should fly away into the air."

We first quoted this little gem from the South Sea and Mississippi Bubbles of 1720 back in July 2008. Twelve weeks later, Lehman Brothers flew away, and BullionVault enjoyed its busiest month ever – right up until August 2011 that is. Banking collapse seems to concentrate the mind like that, and at root, all gold ownership is about trying to stop wealth from flying out of the window. It's not guaranteed to work, of course, but contrary to what economists and financial advisors might tell you, it's also a perfectly rational move amid financial crisis. Yes, really.

Wanting to bury your savings in this rare, incorruptible metal – a physical element used to store wealth for 5,000 years – is a long way from delusional when retained capital faces destruction, on one side, from credit default and from aggressive devaluation on the other. This autumn's very real risk of a monetary train wreck in Europe only makes delivery of Defoe's iron chest more urgent still.

Call it the "gut-level case for gold" – the blunt, elemental fact that gold cannot go broke (unlike a company, bank or government), nor be created (unlike a share, derivative or currency). Yes, it can (and surely will) go down in price, but history's yet to record its market-value at zero. More importantly in a world where, four years after the subprime crisis began, still no one knows where the zombies are buried, gold cannot evaporate. Hell, you need cyanide to dissolve it. Whereas equity-holders can and do get wiped out when a business folds. Bondholders can be and are left holding nothing if their debtor goes bust. Gold just continues to sit there, priced as humanity finds it, and not even bothering to rust.

Instantly priced in a deep, global market, gold bullion also stands apart from real estate. Relatively useless for anything but storing value, it also stands apart from other commodities, including silver. Because gold's small (if consistent) industrial demand doesn't expose it to shrinking economic output, and since 2006, industrial demand has accounted for only 11% of global gold sales. The figure for silver is above 65%.

None of this means gold is sure to rise, or guaranteed to hold its price, either tomorrow, next week or next year. Volatility looks certain (albeit lower than equities), and a banking failure could just as likely send prices down as up in the short term (see here for why). So if you have been considering a purchase, first be aware that isn't guaranteed to work. The risks facing your savings could now be so great, nothing will protect you from loss. But also be sure that, if bought right (and provided the rule of law just about hangs together), wanting to buy gold doesn't mean you're going mad, despite how finance professors might like to treat your delusion.

"Interest rates will not be near zero forever, housing prices will not be depressed forever and like a tree, gold will not rise to the sky," said one certified US advisor and teacher some 12 months (and $600) ago. All very true, but since then, anyone resisting the urge to buy gold will have gone precisely nowhere in stocks, lost yet more money in housing, failed to break even on bonds, and earned 3% less than inflation on their bank savings.

Still, at least they weren't being irrational.

Even when they "get" it, many economists and advisors would rather humor than really engage with the gold buyer's delusion, seeing little place for it outside big, institutional, multi-billion, multi-diversified portfolios. "If you are a high-net-worth investor, a sovereign wealth fund, or a central bank, it makes perfect sense to hold a modest proportion of your portfolio in gold as a hedge against extreme events," as Harvard professor and former IMF economist Kenneth Rogoff wrote some 11 months (and $500) ago.

"But, despite gold's heightened allure in the wake of an extraordinary run-up in its price, it remains a very risky bet for most of us."

Leave gold to the wealthy, in short. It's not for poor, ordinary folk – such as, say, Harvard professors who'd like to share their opinion but can't be bothered to research the cheap, secure, simple ways to buy gold today. Don't you worry yourself about why it rose even before the financial crisis began, nor why it's kept rising since, nor what kind of risks it might (or might not) protect you against from here.

Or so say the professionals.

By Adrian Ash
BullionVault.com

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Formerly City correspondent for The Daily Reckoning in London and a regular contributor to MoneyWeek magazine, Adrian Ash is the editor of Gold News and head of research at www.BullionVault.com , giving you direct access to investment gold, vaulted in Zurich , on $3 spreads and 0.8% dealing fees.

(c) BullionVault 2011

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.

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