Why You Need Some Gold In Your Portfolio – Introduction

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 is gold a commodity? If it is, what is the mass appeal for gold? Which product – apart from ornaments – are made from gold? For example, if we look at copper, it is used to make wires. If we look at silver, it is used in the manufacture of kitchenware and other products. But gold is not used in all that. How many people do you know that own a golden thing? My bet is very few.

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 I 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.

As I 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. In the just concluded month, 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.

Source: Bloomberg

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. First, the crisis between North Korea and the United States continues to escalate. This weekend, reports surfaced that the Rex Tillerson State Department was negotiating directly with North Korea only to be undercut by the president who called the negotiations bluff. 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, we are witnessing a situation in the Fed that might lead to a new crisis. The Fed has decided to continue with increasing interest rates. They have also ended the stimulus package and are in the process of making large asset sales. The implication of all this is 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.

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.