The question among many traders, investors, and speculators alike is what gold is. Is it a currency? Is it a commodity? In many instances, gold is placed in the precious metals category of your favorite platform.
But, again, is gold a commodity? If it is, what is the mass appeal for gold? Which product – apart from ornaments – are made from gold?
How many people do you know that own a golden thing? Our bet is very few.
Just consider this: if you are reading this post from your smartphone, you have a very small piece of gold in your hand (the same is true for desktop and laptop).
Thing is, gold is neither a commodity or a currency. Gold is insurance
Think about this, if you have $1000 today and decide to keep it in your house. In the next five years, you will have the same $1,000 but its value will be much lower. The items you will buy with the $1000 then will be fewer than what you will buy today. Its called time value of money.
What about gold? If you own an ounce of gold today, five years to come, you will have the same ounce of gold. What will have changed is the dollar price of gold.
Since the end of the gold standard, many people have talked about gold being a valueless commodity. They point the issues we pointed above.
However, their thinking is wrong because it ignores the historic background of gold.
In the ancient times, gold was the main means of exchange in many countries. As a result of the bulky nature of gold, the countries decided to move to money because of the ease of printing it.
Today, most governments have vaults of gold. The US’ Fort Knox building holds gold worth more than $180 billion. In total, the treasury has gold reserves worth $11 trillion. Different countries have large amounts of gold.
When you really need Gold in your portfolio
As we mentioned above, gold is like an insurance policy. In the financial market, people rush to gold when new risks emerge.
When the economy is strong, people tend to buy stocks and bonds. However, when they suspect that things are changing, they move to safe havens like gold and gold (twice, just to make you understand how important it is).
In 2017, the market was upbeat with the Fed’s decision to hike interest rates, an indication that the economy is doing well. As shown below, the price of gold tanked while the dollar and S&P 500 strengthened.
The question is, is the world safe now? Is the world a better place to live today than it did in the past?
The answer is...the world is a much riskier place than it was a few years ago.
Recent issues you may need to protect yourself
First, the crisis between North Korea and the United States continues to escalate (you really believed it was all over?). Without negotiations, the world can only wait for further escalations which could lead to war.
In fact, the agency that sets the dooms day clock recently indicated that the world was only 2 minutes to the doomsday.
Apart from the threats of a new war, few years ago we went witnessing a situation in the Fed that might lead to a new crisis. The Fed had decided to continue with increasing interest rates. They have also ended the stimulus package. The implication of all this was increased risk.
As you are aware, the stock market has done really well in a low rate and QE environment.
What makes investors to assume that the reverse will not do the market harm? Its illogical to imagine that. This means that we will likely see huge risks going forward.
Key Take Away
Owning gold is therefore very important. It should however not make a large part of your portfolio if you don’t believe in it 100%.
Hedge Fund manager David Eihnorn who has a net worth of more than $1.2 billion owns a gold vault in a secret location in New York. Learn from him. Furthermore, he was the only prominent investor short Lehman Brothers.