In an interesting article written by Graham Summers on Seeking Alpha about gold during periods of inflation and deflation. Given the current uncertainty as to whether the world will face a period of high inflation (a theory put forward by Summers) or deflation, it is interesting to examine how investment products perform in each scenario.
What Summers discovers is not that gold rises when the dollar falls (the correlation of .28 cited by Scott Reamer of Vicis Capital is not really conclusive), nor its role as a store of wealth (if the dollar collapses, gold will recover due to investors seeking a safe haven, regardless of the correlation between gold and the dollar), but its safe-haven value even during periods of deflation.
To reach this conclusion, Summer draws on Roy Jastram’s book *The Golden Constant*. The author conducted a study of the performance of gold over a 416-year period in English history (from 1560 to 1976). His conclusion is not only that, historically, gold has acted as a store of value through wars, plagues and other vicissitudes, but that this precious metal actually increased its purchasing power during periods of deflation. This finding is surprising, as it was commonly accepted that gold rose with inflation but fell during deflation. Yet historically, this has not exactly been the case.
In addition to the fact that doubts about the value of the US dollar are beginning to affect the general public on a widespread basis, the conclusion of Summers’ article is that gold will perform well in any future scenario, regardless of whether it is inflationary or deflationary. If the dollar changes and falls to a low point, gold will benefit greatly from a flight to quality or by taking on the role of a non-regulatory currency.
If our readers will allow us, we would like to explore the merits of investing in gold in a little more detail.
It is true that for centuries, people have used gold as a store of wealth and as a hedge against market fluctuations, the depreciation of fiat currency and other macroeconomic and geopolitical risks. Perhaps no other market in the world has had the universal appeal of the gold market. Through shares in gold mining companies, ETFs and other gold-based financial instruments, anyone can invest in gold. For those who want physical gold, a German company, T G–Gold-Super-Markt, plans to install vending machines at 500 locations. The first vending machine, on a trial basis, has been installed at Frankfurt Airport (photo above). In Switzerland, it is possible to buy gold bars at post offices.
Investment guides repeatedly emphasise that investment success hinges on diversification and risk management. It’s the old adage of “not putting all your eggs in one basket”. It seems clear that a well-balanced portfolio should include a wide range of assets. But what is not so clear is determining what proportion should be allocated to each asset class. Some gold specialists, such as Mark O’Byrne, believe that an investor should allocate 10–15 per cent of their liquid assets to gold-related investments. The fact is, there are so many ways to invest in gold that, in principle, depending on the chosen method, it should suit speculators, investors and savers alike, as well as those with short-, medium- or long-term investment horizons.
Some even argue that, just as the family home should not be regarded as an investment in itself, physical gold (bullion) is not an investment but a kind of insurance policy, and that it should not be traded but rather form the foundation of the family’s wealth. Is that true?
(to be continued…)