Gold as Insurance?

gold bar

I don’t invest in gold.  I don’t believe gold is a good hedge against inflation.  I also don’t think gold is a good hedge against equities.  I don’t think gold is a safe haven.

I will only buy gold for the purpose of fashioning them into gold teeth to replace my actual teeth when they are all gone.  Then I will add the words “Big Daddy” in front of my name and audition to join the Wu-Tang clan as their token Chinese rapper.

 

If you disagree with my 3 points above please feel free to comment in box at the bottom.  Then we can proceed to have Pro-Gold supporters debating against Anti-Gold supporters while the comments section slowly degenerate to look like the Youtube comments section, a battlefield of keyboard warriors coming up with intellectual insults for each others’ mothers.

 

Let me start by throwing the first stone.  Straight out from the Anti-Gold corner !   Check this out, a graph from Captain Hindsight:

 

gold and recessions


Gold is not a good investment – unless of course, you are a superstar trader who can read EMA, SMA, or whatever oscillator, boilinger bands or breakout head and shoulders patterns….

Gold is not a good hedge against inflation –  equities provide better returns.

Gold is not a good hedge against equities –  there is no correlation. (Look at the graph above!)

Gold is not a safe haven – gold crashed in 1980.  If you had bought gold in 1980, you had to wait until 2007 to you reach the same price as 1980.  That’s 27… freaking … years….

Gold as Insurance?

I happened to stumble upon an interview with Jean-Marie Eveillard, an investing legend, in which he mentioned that he held gold for insurance purposes, against a financial calamity of extreme proportions.  When asked how much gold he held in his portfolio, he revealed that 15% of his portfolio consists of gold!

15%!

His paranoia was contagious. Immediately after watching his video interview, I felt a tinge of paranoia myself.  Am I missing out something?  Few weeks ago, my investor friends were mentioning about gold as insurance, and I cockily announced my ignorance of gold and that my portfolio is 100% stocks. But if a legend like Jean-Marie Eveillard is holding so much gold, then shouldn’t a young noob investor like me take note?

So upon having a frenzied Whatsapp discussion with other stock investors, (‘frenzied’ because after buying stocks there’s nothing much to do except talk about it – c’mon admit it!), and conducting my own ‘research’ on Google, gold as an insurance against extreme financial calamity is based on these theories or practices:

  • Extreme Financial Calamity = permanent collapse of the stock market, over-devaluation of the dollar, paper money becomes worthless
  • In such extreme cases, gold will still be used as currency by banks, governments or other financial institutions.
  • Gold prices are universally recognised
  • Gold will become more ‘valuable’ and investors will flock to it, causing it’s price to rise
  • Gold will be recognised as currency

I find it hard to immediately agree that gold is a good insurance in a financial collapse.  In past cases of recessions, each time people viewed it as a financial calamity, gold prices did not ALWAYS rise.

[Graph removed due to copyright issues – will plot out my own graph…..]

We can study another case of financial calamity in Germany during 1923-1924.  Hyperinflation caused the mark to become practically worthless.

You can check out some of the excerpts documented during that period here.

Here’s one excerpt:

Bartering became more and more widespread . . . A haircut cost a couple of eggs . . . A student I knew . . . had sold his gallery ticket . . . at the State Opera for one dollar to an American; he could live on that money quite well for a whole week. The most dramatic changes in Berlin’s outward appearance were the masses of beggars in the streets . . . The hard core of the street markets were the petty black-marketeers … In the summer of that inflation year nay grandmother found herself unable to cope. So she asked one of her sons to sell her house. He did so for I don’t know how many thousands of millions of marks, The old woman decided to keep the money under her mattress and buy food with it as the need arose – with the result that nothing was left except a pile of worthless paper when she died a few months later.

       As soon as the factory gates opened and the workers streamed out, pay packets (often in old cigar boxes) in their hands, a kind of relay race began: the wives grabbed the money, rushed to the nearest shops, and bought food before prices went up again. Salaries always lagged behind, the employees on monthly pay were worse off than workers on weekly. People living on fixed incomes sank into deeper and deeper poverty.

       A familiar sight in the streets were handcarts and laundry baskets full of paper money, being pushed or carried to or from the banks. It sometimes happened that thieves stole the baskets but tipped out the money and left it on the spot. There was dry joke that spread through Germany: papering one’s WC with banknotes. Some people made kites for their kids out  them.

Egon Larsen, a German journalist, remembering in 1976

 

Instead of gold being the currency of the average person, people went back to barter trade.  I think this definitely makes more sense.  If you were living in such a period where money is worthless, would you barter trade your house or your food supplies for gold bars which do nothing but sit on your shelf to look pretty?

And even in an armageddon or doomsday-like scenario, gold would not provide as good an insurance as religion.  I would choose heaven over gold any day.

Despite expert recommendations, I still remain unconvinced about gold as insurance.  Maybe necessary skills like farming, zombie-killing, thieving, negotiations or Israeli Krav Maga would be of greater insurance.

 

(Like this article, or hate my guts?  Comments are welcomed.)

3 Comments

  1. Scop

    I do keep some gold, physically, in times of hardship or in desperate needs of liquidity. As an investment, definitely not. As a form of security, yes. Plus, most of the gold you keep are usually in decorative purposes, ie. jewellery, coins, designer sheets.

    Reply
  2. blog

    At least it is better than diamonds, so if you have not proposed yet, convince “her” to make a good investment choice over a “proposal ring”.

    Reply
  3. The Bf (Post author)

    Hahaha! That’s asking for death.

    Reply

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