Written by Mark Pey, Director and Co-Founder, Rush Gold
It was the Spanish/American philosopher and essayist, George Santayana, who said that “those who cannot remember the past are condemned to repeat it”. For investors today, especially for SMSF trustees in pension phase for whom capital preservation is critical, it’s a saying they should well heed.
For them, the relevant past is half a century ago – the 1970s. Because there are some startling similarities between then 1970s and what’s happening today, and gold as an investment today could be as pivotal it was back then. Let me explain.
In 1971, the same year that President Richard Nixon took the US off the gold standard, gold was trading at US$35 an ounce. By the end of the decade, it had touched US$850 – a 2,300% gain for the decade, although, to be fair, most of those gains came late in the decade, primarily sparked by the second oil shock caused by the Iranian revolution.
Over that decade, it’s fair to say investors were spooked. They got little solace from equity markets that remained flat, there were two oil price shocks, a weak US dollar (remember Watergate), stagflation, and geo-political tensions, especially in the Middle East and Indochina. In this investment climate, edgy investors looked back to a 4000-year historical truism – in troubled times gold is a haven.
Without overstating the case, many of the same conditions prevail today. The geo-political crises that are the Russian invasion of Ukraine – the biggest military invasion since World War 2 – that has the potential to spark a war with the West, as well as the China-Taiwan issue that was ratcheted up several notches with US House of Representatives Speaker Nancy Pelosi decision to make a highly politicised trip to Taiwan recently.
On the economic front, we have rising inflation, higher interest rates ending a bond bull market that has continued virtually unabated for more than three decades and higher commodity prices. We are even hearing that 1970s economic term, stagflation, re-enter economists’ lexicon.
These historical similarities are reasons enough to consider gold for any investment portfolio. Adding lustre to these historical arguments are some current factors making gold a more attractive investment.
Although interest rates are increasing, they are still historically low, negating an oft-heard argument against gold that it doesn’t pay interest. When cash and term deposits are earning miserly rates, it simply magnifies gold’s potential for capital gain and security.
Then there is the question of supply. Russia is a major gold producer so Western sanctions could see global gold supply cut. COVID, too, continues to inflict economic uncertainty.
But perhaps the most powerful argument for gold lies in the West’s decision to cut off Russia’s access to its foreign reserves of $US630 billion. This is the first time the world has seen such an economic weapon used and the ramifications are yet to be seen.
Since the Asian Financial Crisis (late 1990s), central banks have held much of their reserves in foreign currencies (currently it stands at 78%). But this retaliatory action by the West against Russia brings the whole foreign currency edifice into question and could push central banks down the path of acquiring more hard assets of which gold (currently 13% of central bank assets) is an obvious example.
It takes little imagination to appreciate what more central bank buying of gold will do to the price. So where does this leave the investor, especially those with a focus on capital security? We would certainly advocate having a percentage of an investment portfolio in gold for three key reasons.
First, its 4000-year proven history of being an asset that is global, liquid and an excellent way to preserve capital in volatile times. Second, if interest rates start rising and bond prices fall, the lure of fixed interest as a capital preservation asset loses much of its appeal. Third, the Russian invasion, with all its permutations, could have long-term geo-political and economic consequences.
It’s not only these macro reasons. As an asset, physical gold is real (unlike cryptocurrency), holds its buying power over time, there is finite supply (unlike paper currencies), and, most importantly, there is always a liquid market.
One of the ironies of gold is that it is perhaps the world’s oldest investor market, yet many investors today still see it as a piece of jewellery – not an investment. The 1970s changed that perception for many people, and I suspect the 2020s and beyond could do the same.
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