Golden Beauty

I have been contemplating whether to write this post. Afterall, investing in gold is a highly specialised field that I'm beginning to understand a little only recently. Therefore, I'm most grateful to anyone who can give constructive inputs and suggestions about this topic.

First of all, I regard gold as more of a hedge than an investment vehicle for capital gains. Gold serves as a store of value more than any kind of asset I can think of. Gold is practically indestructible with its high melting point and chemical inertia. Most of all, it is an asset that does not depend on any individual or institution for its returns. For example, the returns on stocks and bonds are tied to the performances of companies. Even bonds, during a depression, may be totally wiped out if the company in question is bankrupt. Real estate prices also tend to plummet during a depression when people no longer buy or rent estates. Currencies of the affected countries will also decline in value due to speculations and an outflow of trade and capital. However, gold, this ancestral relic that has survived for centuries will most probably still keep its value, or its value may even increase exponentially due to panic buying. This is because no company or government is going to default on gold. Another reason why gold keeps its value is because people still trust that gold is in demand no matter which economic situation we are in. I suppose it has to be our ancestral instincts and ego for the glamorous that protects gold's value. Afterall, though gold has its practical uses in the medicine and industrial fields, 75% of it is used for jewelleries which aren't very productive in a recession.

Actually, gold first caught my attention when Robert Kiyosaki, author of Rich Dad Poor Dad emphasised its value. Later, I found out that some investors have reverted their strategies to the early 1900s whereby 10-20% of assets is allocated to gold. With the abolishment of the Gold Standard and the Bretton Wood's System in the 1970s, fiat dollar, which is currency unbacked by any asset and whose value is set by the government, became the legal tender. The problem is that the US government has time and again shown its incapability to cope with rising inflation with the fiat dollar. Gold prices before the abolishment of the Bretton Wood's System were around 30 dollars per ounce, but now it has risen to almost 600 dollars per ounce! On top of that, several trends have shown the situation would only get worse in times to come. The US burgeoning trade deficit is constantly hurting the dollar's value. The debt situation has reached epidemic levels of $40 trillion which is several times the size of the entire US economy. In the event that the US is unable to pay its debts, either rapid inflation may occur with the government printing more money to finance its debt or the economy may just collapse and liquidate, which will also send the US dollar to its graveyard. A ripple effect will happen which will also devastate our economy seriously since it depends so much on America's imports and investments. However, gold will retain its value as currencies around the world plummet because it is one of the most trusted forms of exchange which does not depend on any government or institution. Since many major currencies are pegged or floated closely to the US dollar, their fall is also inevitable.

Of course, there may be several disagreements regarding the importance of gold in portfolio diversifiation. However, what truly convinced me is that the value of gold has never been successfully suppressed for a long period of time. Even when the major central banks of the world desperately tried to sell their gold reserves to bring down the gold price, history has shown that people quickly hoarded up these gold and the gold price rebounds back. Even during the 1929 Great Depression, gold prices slipped slightly in 1931 but regained to its original level in 1932. In fact, gold prices has been steadily climbing if not for the occassional futile efforts of governments to curb its value. All in all, in my opinion, since "diamonds are a girl's best friends", (quote from Satin in Moulin Rouge), gold bullions are an investor's best friends.