I like to think of us Right-Siders as an army of savers that make the most of what’s thrown at us. We will carry on, no matter what the crisis.
And one of the key weapons in our armoury – and one that I often urge you to stash away is gold. Yes, I know this is a difficult investment to make. But in this Right Side I’d like to offer a little bit of background intelligence on old ‘yella’. And why I think it’s so vital that you own at least 5% to 10% of your assets in gold right now.
Gordon Brown may have done a very shrewd thing
Gold has never been held in such low esteem. Today this savings currency makes up around 1% (possibly 2% depending on which investments you count) of investable assets.
Now, if you’re a believer in modern finance and all its fantastic paper promises, this low figure stands to reason.
But be in no doubt, this is very much a modern phenomenon. Here’s a chart from Bullionvault to put the savings game into perspective. It shows what our central banks have been banking on over the last thirty odd years.
There has been a fundamental shift in economic thinking. Dump gold and grab paper...
The role of the central bank must not be underestimated. By now we’re all well aware of the immense power wielded by the likes of the Federal Reserve, the ECB, or even our own Bank of England. But we mustn’t forget, these banks do much more than just play around with money supply and interest rates.
Central banks are the conduit through which nations trade. And they also store a nation’s savings. OK, so Western nations don’t have a lot of savings to talk of these days, but others do. And the chart shows something very, very interesting.
The central banks have taken exactly the same view as society at large. That is, gold is a barbarous old relic. It has no fundamental value. Why hold gold when you can hold interest-bearing paper?
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And frankly, the central banks have been more right than wrong over the years. In retrospect it may look like Gordon Brown made an extremely bad call selling half our nation’s gold at the bottom of the market. But if you look at it from his side of the fence, you may see some logic...
Here was gold, costing money to store in a vault and yielding no income whatsoever. And yet he, along with the Bank of England, could trade in this white elephant and buy currency reserves instead.
As the chart shows very clearly – this is what most central banks were doing. If not dumping gold, they were certainly building up paper promises. And if you’re a believer in paper finance, it made perfect sense. Maybe we shouldn’t be so hard on old Gordon –or question his faith?
Why I have little faith in paper
All of my years have been lived under what you might call the paper epoch. Yes, born in 1971, it was the year that saw the final link with the global gold standard truly severed.
I have no memory, and no reason to hark back to the golden days. So why do I?
Well, it’s a matter of historical context – and faith. I guess the chart tells the story. Society has put all its faith in paper promises. And to a degree, I have too - that’s where the money is!
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But as I frequently point out here at The Right Side, there are limits to my faith in this system. And it seems more people are starting to come round to my way of thinking. Especially the central banks.
Yes, the central banks that have any savings to speak of are gradually stockpiling gold. The chart is interesting. It shows that gold savings have risen (ever so slightly) over the last couple of years... But paper savings (the green blocks) – well, they’re growing faster still. Paper is rapidly appearing out of thin air.
Today’s article is not an attempt to try to explain the myriad reasons why and how this paper epoch is nearing its end. I just want to make the point that it’s not just me starting to take gold savings seriously. The guardians of sovereign wealth (nations that have any wealth) are increasingly turning to gold.
The chart is interesting. And I’m repeating it here, as I think it’s really worth your while taking it in:
If (and it’s still a big if) the paper based system is called into question, then you can expect the gold price to go up some 15 times in order to get the gold/currency balance back to some semblance of historical normality.
But of course, any such event will probably call for much more paper printing. The gold price could well jump up exponentially.
The green blocks of central bank paper reserves are breath taking. The vast majority of them are IOUs issued by the US government. Other IOUs that are considered savings come from similarly dubious Japanese and European governments.
In order to pay the much vaunted interest on this paper, the governments simply print more of it. And so the green blocks continue to grow. Can this trick go on forever? Not likely...
This is not a religious newsletter. You put your faith where you like. But if you want my advice, it is tuck away between five and ten percent of your assets in gold.
Paper currency epochs tend to be short-lived - it may sound a bit cranky to put cash in gold, but if the worst comes to the worst, there’ll be a global rush for the stuff. To my mind, the slow rush has already started. If the dark green line heads back to pre-paper normality, then you’d better hold on to your hat (or should I say gold!)
• This article is taken from the free investment email The Right side. Sign up to The Right Side here.
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