{"id":29489,"date":"2012-05-06T23:34:50","date_gmt":"2012-05-07T03:34:50","guid":{"rendered":"http:\/\/countingpips.com\/forex-news\/2012\/05\/why-buy-or-invest-in-gold\/"},"modified":"2012-05-06T23:34:50","modified_gmt":"2012-05-07T03:34:50","slug":"why-buy-or-invest-in-gold","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/forex-news\/2012\/05\/06\/why-buy-or-invest-in-gold\/","title":{"rendered":"Why Buy or Invest in Gold?"},"content":{"rendered":"

By MoneyMorning.com.au<\/a><\/strong><\/p>\n

Why buy gold<\/strong>?<\/p>\n

One of the problems with putting a price on gold \u2013 as gold perma-bears regularly point out \u2013 is that it doesn\u2019t pay an income.<\/p>\n

Generally, the starting point with valuing an investment is to work out how much income it will pay you in the future, then work out how much you are willing to pay for that.<\/p>\n

With gold paying neither dividends<\/a> nor rent, you can\u2019t do that. So how do you value it?<\/p>\n

<\/span><\/p>\n

I\u2019ve just read an interesting report from Julian Jessop at Capital Economics that has a crack at it\u2026<\/p>\n

Three Scenarios for Gold: From $1,000 an Ounce to $5,000<\/h3>\n

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Capital Economics has outlined three scenarios for gold over the coming few years. The basic assumption underlying the scenarios is that gold ultimately benefits from financial shocks. In this case, their biggest concern is the eurozone.<\/p>\n

Jessop notes that gold has \u2018moved fairly closely in line with the cost of insuring against sovereign defaults<\/a> in Europe.\u2019 In other words, as anxiety grows about the condition of Europe, the gold price tends to rise<\/a>.<\/p>\n

Their central scenario is that Europe experiences a \u2018relatively orderly\u2019 break-up, with one or more small countries leaving the eurozone. As a result, the Federal Reserve would keep monetary policy ultra-loose (even if it avoids more quantitative easing<\/a>), and gold would rise to $2,200. Even at this price, it would still be lower than the inflation-adjusted all-time high of 1980 (which was $2,400 in real terms). It would also be reasonably priced compared to oil<\/a>.<\/p>\n

But what about other outcomes? There\u2019s the disaster scenario, of course. If there\u2019s \u2018a chaotic break-up of the euro\u2019, then this could well result in a Lehman-style financial crisis. Throw in a military conflict between the West and Iran, and you could see the gold price spike<\/a> to \u2018as high as $5,000\u2019. It\u2019s a pretty extreme, though not unthinkable outcome, and Capital Economics only assigns a 10% chance to this scenario.<\/p>\n

The other possibility, is the more optimistic view. The global economy continues to recover. The eurozone manages to hold it together. As a result, the Fed starts to tighten monetary policy earlier than expected. In this case, Jessop reckons that \u2018the downside for gold should still be limited by strong and rising demand from emerging economies, and we would not expect to see a return to the November 2008 lows [of $710 an ounce].\u2019 But $1,000 an ounce would be a possibility.<\/p>\n

I\u2019d say that\u2019s a pretty sensible range of views. But it leaves us with a very wide range of predictions – $1,000 to $5,000 an ounce. And realistically, these could be well off the mark. If the global economy went into meltdown, who knows just how high gold would go? Alternatively, if the economy recovers, and the Fed starts raising interest rates, would $1,000 really mark the bottom?<\/p>\n

And none of this takes into account the danger of a hard landing in China<\/a>. Hedge fund manager Hugh Hendry of Eclectica sees this as being an even bigger threat to the financial world than Europe. Everyone is focusing on Europe, as he notes. Very few people are really paying attention to the risks from China.<\/p>\n

So as an investor, what does this mean for you in practical terms?<\/p>\n

Gold\u2019s Role in Your Portfolio<\/h3>\n

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We like gold<\/a>. But as we\u2019ve also noted a number of times, you shouldn\u2019t have all of your money in gold<\/a> \u2013 and certainly not in gold mining stocks<\/a>. We all have our own views on asset allocation, and what\u2019s right for you will depend on your own circumstances. But I\u2019d see 10% as a reasonable sort of holding.<\/p>\n

Gold is insurance<\/a>. It\u2019s there to diversify your wealth. But it\u2019s also there to ensure that even in a worst-case scenario, you\u2019d still have something of value in your portfolio.<\/p>\n

Gold is not like cash in the bank. Its nominal value can go up or down. If you\u2019d piled all your money into gold at the 1980 peak, you\u2019d still be sitting on a loss in real terms (ie after inflation). Just as if you\u2019d piled into stocks at the height of the tech bubble. That should be obvious to anyone who can look at a price chart, but with descriptions like \u2018safe haven\u2019 often bandied about, it bears mentioning.<\/p>\n

The point of gold is that it offers you some protection when most other assets are going down<\/a>. Gold\u2019s ultimate advantage over any other asset is that its value cannot fall to zero. It can\u2019t go bankrupt. You can\u2019t say that for any other asset.<\/p>\n

So when people are fretting about the state of the global financial system, and the integrity of all other assets, that\u2019s good for gold. Once confidence returns, and other assets start looking more attractive, that\u2019ll be bad for gold.<\/p>\n

The point is \u2013 as with any asset – to make sure that you aren\u2019t over-exposed to gold, so that even when the bull market in gold<\/a> ends, the rest of your portfolio is benefiting from the return of the good times.<\/p>\n

However, with Europe on the edge<\/a>, and China wobbling too, I suspect we\u2019re at least one big panic away from genuine confidence being able to return to the market. So I can easily see gold hitting new highs before this bull market is over.<\/p>\n

John Stepek<\/strong><\/p>\n

Editor, MoneyWeek (UK)<\/strong><\/p>\n

Publisher\u2019s Note: <\/em>This article originally appeared in MoneyWeek (UK)<\/a><\/em><\/p>\n

<\/strong><\/p>\n

From the Archives\u2026<\/em><\/strong><\/p>\n

<\/strong><\/p>\n

Why China\u2019s New Consumer Economy Won\u2019t Give You the Trade of the Decade<\/a><\/p>\n

2012-05-04 \u2013 Kris Sayce<\/p>\n

Why China Could Be The Next Destination For the Financial Crisis<\/a><\/p>\n

2012-05-03 \u2013 Merryn Somerset Webb<\/p>\n

How Did We Get It So Wrong on Australian Housing?<\/a><\/p>\n

2012-05-02 \u2013 Kris Sayce<\/p>\n

This Indicator Shows the Copper Price Could Be Set to Soar<\/a><\/p>\n

2012-05-01 \u2013 Dr. Alex Cowie<\/p>\n

How Gold Nanoparticles Will Create A New Kind of Gold Rush<\/a><\/p>\n

2012-04-30 \u2013 Michael Robinson<\/p>\n

For editorial enquiries and feedback, email letters@moneymorning.com.au<\/a><\/p>\n

\n<\/img><\/a> <\/img><\/a> <\/img><\/a>\n<\/div>\n


\nWhy Buy or Invest in Gold? <\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

By MoneyMorning.com.au Why buy gold? One of the problems with putting a price on gold \u2013 as gold perma-bears regularly point out \u2013 is that it doesn\u2019t pay an income. Generally, the starting point with valuing an investment is to work out how much income it will pay you in the future, then work out … <\/p>\n

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