There is often economic debate about Gold? Is Gold a bubble? Will it crash? Will it keep going up? 2012 was the 12th straight year that gold has gone up in price, leading many economists to call it ‘a bubble’. Yet last week, the German Bundesbank made headlines when it was reported that they are looking to repatriate home the gold they own, much of which has been sitting in French, English and American vaults since the end of Second World War. Would they go to all that effort if they thought the price was going to fall?
The irony here is that when it comes to Germany and their gold, after the Second World War, it was the Germans themselves who were looking for protection from Boris’s Russian comrades. Fearing a Soviet invasion one day, the Germans moved a large portion of their gold stockpile to France, the UK and the USA.
Some 60 years later, the Germans want their gold back, as, in their own words ‘gold is important’ and it will allow them ‘to build trust and confidence domestically’.
As a result, the Germans have decided to move all of the gold they currently hold in France back to Frankfurt, as well as a large portion of the gold they currently hold in the United States.
It’s not only the Germans either. There are reports the Dutch may do similar, and over the last few years, the central banks of China, Russia and Brazil (amongst many others) have been adding to their gold stockpiles at a rapid rate. These are decisions made with multi-decade timeframes in mind. The Chinese have effectively banned exports of gold from the country. Clearly, some very well connected and influential financial institutions are getting their hands on as much bullion as possible.
It also leads to an interesting question. When you consider the costs involved, the risks of theft, and the logistical nightmare of moving thousands of tonnes of gold halfway across the world, would the Germans go to all this effort if they thought gold was going to become less valuable in the future? And would other nations be buying it up?
The prices of gold and silver have been going up on average 14% per annum for nearly 10 years. Over the same period, superannuation funds (which do not invest in physical precious metals) are not even keeping up with inflation.
The economists managing our large super funds have long called the gold price a ‘bubble’, arguing it is not a productive asset, and the price is driven purely by speculation. At the same time, these were the same people who said by the end of 2008 the equity market would be around 8000 points (5 years later it is still nearly 40% lower).
We believe these economists continue to misdiagnose what gold really is. Gold is an alternate form of money to the dollars we keep in our bank accounts. Those dollars earn interest (which we pay tax on), but are also eroded by inflation over time. Gold on the other hand pays no interest, but over time it’s the one asset which maintains purchasing power with inflation. As long as interest rates remain low and governments keep printing money, we see gold as a core asset in any genuinely well diversified investment portfolio
People who are looking to protect and grow their wealth these last few years have moved out of traditional superfunds and many have used a portion of their assets to buy bullion. It’s a strategy that has worked well in recent years, and is likely to continue working while the world economy continues to struggle with the global debt crisis.
Billionaires and legendary investors like George Soros, John Paulson, Ray Dalio and Kyle Bass, are all buying Gold or already own large holdings of it. Several have provided compelling research to suggest the price of Gold will continue to go higher. It often pays to follow in the footsteps of the wealthy and well connected