by Mario Innecco
We might get bogged down with the price of gold in the short term but what we need to understand is that gold has acted as a store of value or wealth for millennia. Fiat currency, paper money, or what we use as money today always returns to its intrinsic value: zero as Voltaire once said.
Even though the world’s monetary system was detached from gold by President Nixon on August 15, 1971, sovereign nations around the world, through their Central Banks, still hold and have been adding to their gold reserves. According to the World Gold Council, official gold reserves were approaching 35’000 metric tonnes in 2020 which equates to around 17.5% of all gold ever been mined that is above ground or 200’000 metric tonnes.
We think that looking at gold as speculation in order to take profits in one’s local currency is not the best strategy even though sometimes it is necessary, in case of an emergency or an interesting shift into an undervalued asset, to cash one’s gold so to speak. One of the most important attributes of gold as a monetary asset is that it has an impeccable record as a stable store of value. One troy ounce today still commands a reasonable purchasing power pretty much as it did two hound years ago in ancient Rome for example.
Looking back to 1971 which was a watershed moment in monetary history the trend for the fiat or paper dollar has been one of debasement on its way to zero as Voltaire aptly put it. Back then for $1 one could get 1/35th of a troy ounce of gold while today $1 will only fetch around 1/1860th of a troy ounce. In British pounds, one could get 1/17th back in 1971 while today only 1/1375th of a troy ounce of gold. Is it any wonder that we are now seeing a culmination in the cost of living crisis as the over-issuance of fiat currencies leads to the dilution of their purchasing power?
The price of gold in GBP or £ since 1968
So, gold is a very good generational insurance policy versus fiat currency debasement with the important quality that it is accepted anywhere around the world as liquidity or even as a barter instrument in times of crisis. Former French President Charles de Gaulle once said the following: “Gold is considered, in all places and at all times, the immutable and fiduciary value par excellence.”
In today’s world of negative real bond yields it is more important than ever to add on as much gold or monetary insurance as possible and while the fiat price of gold might fluctuate, sometimes wildly, in the short term in the long term the yellow metal is a stable and readily accepted store of value. We think dollar cost averaging or acquiring gold at regular intervals is the best strategy.
Gold has always been the enemy of those who wish to push the big government and public spending and why would that be? Well, it is because a currency anchored to gold limits how profligate governments and politicians can be as there is a limited and finite amount of gold unlike in our current system. We have seen that since 2008 the Chancellors of the Exchequer from both sides of the House have not been shy about throwing around hundreds of billions of pounds to bail out failing banks, the housing market, shut down an economy, and keep the public happy.
While it might be difficult to stop the growth of government and Chancellor Sunak’s profligate ways one can fight this by storing one’s savings, whenever possible, in gold. The way to think of the national currency or the pound is that it is the flip side of all the debt our political masters have taken on our behalf since the 1690s when William and Mary started racking up the national debt with the help of the Bank of England. It is very easy to issue this debt and turn it into currency but digging gold out of the ground or earning it through hard work is a different story. With the national debt approaching £3’000 billion or £3 trillion it has more than trebled from around £800 billion in 2008. The amount of gold reserves held by the UK Treasury, though, has stayed constant at 310 metric tonnes since Gordon Brown sold half of the country’s reserves around the turn of the century.
The best way for UK residents to save in gold is via coins of the realm of the traditional gold sovereign and Britannias. The gold sovereign, the half, quarter sovereigns, and the Britannia coins all have legal tender status and are not liable to VAT nor capital gains taxes. We would encourage those that have an interest in acquiring gold to do their due diligence and not take our opinion as advice. We would also point out that finding a reputable gold bullion dealer is important and just as it is important to find a reputable estate agent or car salesperson. There are a handful of reputable dealers that can be found online and one of them is a family business we have dealt with for about twenty years called Gold Investments. Mike Temple founded the business back in 1981 and his sons Oliver and Simon continue the tradition. Aside from being able to deal online via www.goldinvestments.co.uk, you can also call them on the phone or even go to their offices in the City of London in person. Make sure you give them the promo code “maneco64” as that will get you a small discount on the price.
In conclusion, aside from being a precious metal used for jewelry and ornaments gold, as JP Morgan, founder of the eponymous bank said, is money and everything else is credit. So aside from being a stable store of value or wealth over time, the yellow metal provides the holder an extra layer of safety as it is an asset held outside the banking system.