Investors Fleeing Risk to Embrace Gold

Investors Fleeing Risk to Embrace Gold

Gold has endured more than its share of abuse over the years.  Several years ago, in a Seeking Alpha column, research analyst Jason Schwarz thumbed his nose at the precious metal, labeling it “economically irrelevant.”

If that weren’t enough, many seasoned investors still quote Warren Buffett’s simplistic characterization: “It doesn’t do anything but sit there and look at you.”  And let’s not forget the great economist John Maynard Keynes, who slapped gold with its most legendary insult, referring to it as a “barbarous relic.”

Gold’s role in our contemporary economy, including its resurgence in the face of ugly new marketplace realities, proves all three sages wrong. Gold is economically relevant precisely because it sits there and does little else but look at you. In other words, it’s an anchor in a weak and unreliable global economy.

When pundits rail at gold, it’s because it’s a reminder all is not right with the world.  Gold is where investors flee when the going gets tough, banks impose negative interest rates and equity markets go south.  A February 15 Financial Times article makes an insightful case for gold’s unmatched hedging property:

“….[G]lobal equities have fallen more than 20 per cent since last May, entering a bear market.  Last year gold slumped as investors fretted about the Federal Reserve’s first rate rise. Now they are focused on the opposite: the prospect of falling and even negative interest rates across the globe.

That has prompted fears of a global economic slowdown and a feeling that central banks have run out of tools to stimulate their economies. For long-term gold supporters it is confirmation that central banks cannot be trusted not to debase a currency in times of crisis. They see gold as a long-term store of value.”

Professional investors and traders relish making negative comments about gold when things are going well. But when conditions turn bleak the stampede back to its safety is deafening.  One noted Chinese economist, Barnabas Gan, went so far as to admit he’d underestimated the shiny metal, and re-characterized it as a “superhero” that could spike as high as fourteen hundred dollars an ounce on investors’ continued flight from risk.

Again, the Financial Times article cuts to the heart of the matter, citing a JP Morgan analysis which shows gold has proven a better investment than equities, bonds and a “broad commodities index” in an era of low and falling interest since 1975.  If you’ve been on the fence about investing, this is a trend you’ll want to heed.

While equities salespeople tease our hopes with “projected” prices of particular momentum stocks, value stocks and even penny stocks, gold retains a known and credible value. Investors understandably flee to gold when these high hopes for their paper assets have been dashed – but by waiting they pay a premium.  The ones who win are the ones quietly observing early on, who see which way the wind is blowing and act before the mob drives up the price.

Because gold has been around for thousands of years, it’s proven itself as a reliable and profitable investment. With due respect to multi-billionaire Buffett, for whom investing isn’t a matter of survival, it’s better to build wealth with gold that sits there and looks you in the face than it is to risk it with stocks that slink away after losing all your money.