Perhaps Mark Twain said it best:“I am more concerned with the return of my money than the return on my money,”
Of the 92 naturally occurring elements on earth, Au (gold) is often described as the “noble metal”. The elemental particles making up physical gold are organized in a manner that makes them unreactive with air, or “immortal” as pure elements. It doesn’t tarnish, evaporate or decay. Gold has no lifecycle, and for reason unbeknownst to us, it resists entropy. Over 5000 years of monetary experiments, civilizations consistently resolved that gold was the most dependable element to possess for wealth preservation..
Over time, Gold has been widely considered a crucial safe haven asset to hold amid periods of unexpected financial market turmoil, severe economic downturns, monetary dislocations, or geopolitical turbulence. More than ever, today’s world is manifesting these uncertain unstable conditions, and seemingly all at once. Gold is the only asset class that has consistently and unequivocally performed as long standing financial wealth protection during precarious periods. Quite simply, Gold has always served as the most trusted financial insurance policy on earth.
The key to gold’s appeal has been its ability to consistently maintain its purchasing power over time, unlike currencies solely backed by the good faith and credit of indebted Governments which incessantly issue more and more fiat paper money. Gold is the only money that has never failed throughout human history. You don’t see national central banks holding any other kind of commodities as reserve assets, do you?
Importantly, Gold is a vital asset to hold during extended periods of low interest rates as we have today, as it acts as a crucial hedge against the adverse inflationary effects of excessive monetary accommodation as well as currency debasement. Furthermore, in a low or negative interest rate environment, the opportunity cost of holding gold is of little consequence when the interest on saving accounts is near zero, as it is today. To be sure, Gold’s protection does come at a nominal cost during the “good times” associated with economic growth and global stability, but you don’t stop paying the premiums on your home insurance policy simply because your house hasn’t gone up in flames.
The key to asset diversification is finding investments that are not closely correlated to one another. Gold is precisely such an uncorrelated asset. It is highly valued as a unique investment in this regard, as the hard asset class has little to no correlation with any of the other major asset classes. As such, investment grade bullion reduces risk profile when added to standard portfolio allocation models.
The investment thesis for holding physical gold in a retirement account primarily lies in its role as the ultimate diversification safety net, protecting all other investment allocations in a savings portfolio. Truly diversified investors combine physical gold as a counter cyclical investment to standard paper obligations (equities / bonds, ETFs, REITs, Mutual Funds…etc.) so as to properly balance a portfolio, reducing overall volatility and risk.
Positive skew is another diversification attribute of holding gold in a retirement portfolio. Unlike the stock market, gold prices tend to rise faster than they fall. Coupled with its low-to-negative correlation, that means gold has worked quickly in the past to reduce the overall impact of sharp losses on other assets in a portfolio.
Validated research into asset allocation with physical gold show it working time and again to hedge investment risk. For centuries, The Swiss Private Banks have been advocating precisely this investment strategy, advising their high net worth clients to hold 5-10% of the hard asset class in their long term portfolios. It goes without saying, that all investors should hold the hard asset class as wealth protection for their retirement.
Counterparty risk is the risk you run that the institution with whom you have entered a financial contract will default on the obligation, failing to fulfill their side of the contractual agreement. Financial investment products such as stocks, options, bonds and derivatives always carry counterparty risk against the institutions that issue them and/or hold them in your name. Physical gold, on the other hand, carries no such risk because not only is it is an asset directly owned by the titled holder, it is also not anyone else’s liability. Once gold is in your possession, it has no risk exposure related to institutional clearance or settlement. Only you own the underlying asset not a security or promise against the asset. You yourself own it, period.
Counterparty risk was a major cause of the real estate collapse of 2008 with the default of so many collateralized debt obligations (CDO). Mortgages were securitized into CDOs for investment and backed by the underlying assets. When borrowers started to default on mortgage payments, the bubble burst, leaving the investors, banks and reinsurers on the hook for massive losses.
All our clients’ physical gold bullion is held strictly in the name of the title holder and securely vaulted outside the banking system, negating all counterparty risk. Our client’s gold is truly a risk-free asset. Banks may fail, Exchanges can breakdown, Obligations can be defaulted on, but these events have no bearing on the direct titled ownership of our client’s gold holdings.
In terms of monetary value, more gold is traded each day than all stocks worldwide. Demand for gold is diverse and widespread. The depth and breadth of the market in gold is greater than all but the two of the largest financial debt markets in the world (U.S. & Japan), surpassing the size of all individual European sovereign debt markets. Furthermore, the liquidity characteristics including daily trading volumes, average bid-ask spreads, and countercyclical qualities show that gold is as liquid as most sovereign debt bonds, if not more liquid.
Alan Greenspan, former Chairman of the Federal Reserve, confirmed the universality of gold by stating the following:
“No questions are raised when gold or direct claims to gold are offered in payment of an obligation; it was the only form of payment, for example, that exporters to Germany would accept as World War II was drawing to a close.”
“Today, the acceptance of fiat money — currency not backed by an asset of intrinsic value — rests on the credit guarantee of sovereign nations endowed with effective taxing power, a guarantee that in crisis conditions has not always matched the universal acceptability of gold.”
“If the dollar or any other fiat currency were universally acceptable at all times, central banks would see no need to hold any gold. The fact that they do indicates that such currencies are not a universal substitute.”