Gold is not just for the wealthy or to massage our ego

Gold, the best known of precious metals, is bought in many different forms for different reasons. The metal is mined, refined, and sold to producers licensed by the government to mint coins of 99.9% purity, known as ‘fine gold’. Gold is also made into bullion bars of varying weight which are 99.5% pure.

In the production of jewellery, the bullion is mixed with other alloys to enable the pieces to be made and sold to clients like Rolex and Cartier. The largest retail market for gold jewellery is in India, Saudia Arabia and the Arabian Gulf states.

Gold has had an attraction for the wealthy and governments since the early Egyptians some 4,000 years ago. The world’s reserve currency in the 19th and early 20th centuries, then the British pound, was backed by gold. The Bretton Woods conference in 1944 elected that the US dollar would be the global currency. In 1973, President Nixon took the USD off the gold standard. Until then governments could not print more paper money than they owned gold, but after 1973 the US could print by decree (fiat in Latin) an unlimited amount of paper. Other governments followed.

Following the great financial crisis of 2008, the four main central banks, particularly the Peoples’ Republic of China, became aggressive buyers of gold bullion, which has continued to today. Why?

In a word, inflation. According to Milton Friedman, inflation is ‘taxation without legislation’ and ‘always is a monetary phenomenon’. In short, too many dollars chasing too few goods. Central banks know that valuing their treasury reserves in the fiat paper that they are printing with impunity is eroding the purchasing value of the paper or coinage.

The US Congressional Budget Office, a socialist-leaning think tank, estimates that the USD will lose 75% of its purchasing power over the next 10 years. This reflects a cynical and deliberate strategy by the government treasury to deflate away their public debt at the cost of consumers. Since 1955 there has not been a single year when the Consumer Price Index declined.

Expressed another way, the total debt is 120% of all US revenue, meaning they spend more than they earn. Europe is worse. The cost of the interest on US debt is increasing at an eye watering USD 2 trillion per annum to fund 120 trillion of net present entitlements.

If this is true, how can we maintain the purchasing power of money? One way is by growing our capital by more than the decline in purchasing power. But we cannot guarantee this. If like the central banks we own gold bullion, we will be able to shelter the value of our capital from the ravages of inflation. We provide our clients with valuations in gold as well as fiat currency, so they know the true value of their net worth. Investors would be well advised to do the same. If you wish to comment on this article or know more about owning and storing gold bullion, please feel free to write to me.