Gold as a wealth insurance policy is looking more attractive all the time…
Moody’s downgraded Portuguese and Hungarian bonds to junk status last night.
And yesterday there was a run on Latvian bank, Bankas Snoras AB.
‘Depositors can withdraw 50 lati a day beginning today for the rest of the week, said [Irena] Krumane [head of Latvia's bank regulator] at a press conference.” At today’s rate this is about $95.’
And that’s on top of every other Eurozone issue you’ve read about in Money Morning over the last two years…
But so what?
The ECB will start printing money soon, right? They’ll buy up Spanish and Italian debt… won’t they? (ECB officials have given no indication they will do this but the markets think they are bluffing.) We’re not so sure.
If you’re not so sure either, we have some advice for you…
One of the safest ways you can hedge against a lack of confidence and trust in the financial system is to own physical gold.
When you own physical gold – and have it stored securely – your assets are outside the financial system. No matter what happens to financial markets, you have a portion of your wealth out of harm’s way.
Think of it as wealth insurance.
Given the intractable problems within the European Union and the latent debt crises in Japan and the US, gold is one of the only assets I can see increasing in value significantly in the next five years.
Where could gold prices go?
US$5,000 an ounce is possible as trust and confidence in the system deteriorates.
Part of the psychology of a bear market is that investors slowly change their thinking from ‘how to make money’ to ‘how not to lose it’.
And each year, more and more investors will want to take out insurance in the form of gold. This means they will move a portion of their assets out of paper (say government bonds) and into physical metal.
And I’m not just talking about individual investors.
I’m talking pension funds and insurance companies. Once they realise their vast holdings of ‘risk-free assets’ (government bonds) are not risk free, they will start to allocate a small portion of their capital to physical gold – the great protector of wealth in times of financial turmoil.
But that is all in the future.
The chart below shows the US dollar gold price since 2006. Can you spot the trend?
After advancing to record highs earlier this year, gold is now in a ‘consolidation’ phase. How long this lasts… who knows. If Europe implodes, we could see another sickening 2008 type correction.
We’re putting a low probability on that outcome though.
Since 2009, gold has held above the 200-day moving average (red line) and I think that will continue to be the case.
Click here to enlarge
Editor, Sound Money. Sound Investments
Publisher’s note: Greg Canavan is the foremost authority for retail investors on value investing in Australia. He’s the former head of Australasian Research for a major asset-management group and a regular guest on CNBC, Sky Business’s ‘The Perrett Report’ and Lateline Business. Greg shares his insight, ideas and investment recommendations with readers of his Sound Money. Sound Investments newsletter… to find out more information on Greg’s letter, go here.
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Written by Greg Canavan
Greg Canavan is a feature Editor at The Daily Reckoning Australia and is the foremost authority for retail investors on value investing in Australia.
He is also the author of Sound Money. Sound Investments (SMSI). An investment publication designed to help investors profit from companies and stocks that are undervalued on the market.
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