Here’s Another Reason to Buy Gold at the ‘Bottom’

It’s official.

Germany wants its gold back.

You can hardly blame them. Leaving gold in the hands of the US Federal Reserve is like asking a drug junkie to look after a $50 note.

You wouldn’t trust the junkie, and rightly, the Germans don’t trust the Fed.

The thing is, we’re stumped by one thing: the idea that the German government and central bank are different to every other government and central bank.

Germany’s motive for getting its gold back is only partly due to fear of the Fed ‘junkies’. The other part is because they want it in their own hands for the next stage of the central bank money-printing strategy…

Let’s get this straight. Germany is no more interested in sound money than any other Western economy.

Germany is only interested in power…increasing its power over the rest of Europe. And part of that strategy involves reclaiming possession of its gold stash from overseas.

Our old pal, Dan Denning has shown his readers the power and importance of gold, and where it fits in the financial system. He showed his readers Exter’s Pyramid. Exter’s Pyramid details the hierarchy of financial assets in an economy. You can see this below:

Exter's Pyramid



As you can see from the chart, gold is the bedrock of the financial system. It supports everything else…even paper money. If it wasn’t for gold, the world’s central banks couldn’t get away with introducing paper money.

It’s just that over the years they’ve issued so much paper money, the relationship between it and gold has almost disappeared.

But that doesn’t mean gold is less important today than it was 100 years ago. In fact, we argue that it’s more important because everything above gold (in terms of Exter’s pyramid) is much more leveraged and fragile than in the past.

That’s why we continue to recommend you hold gold in one form or another in your investment portfolio…

Shares are Better Than Gold, But For How Long?

But here’s the thing. While we like gold, and we personally invest in it, we’re not one of those gold bugs who put all their wealth into it. At the moment, we’ve got about 40% of our savings in gold. We think that’s enough. Because in the short to medium term we want to make sure we invest in other things too…such as shares and other investments.

For example, given all the global economic instability over the past year – US debt, Eurozone debt, resources collapse, and China slowdown – what has been the best performing asset, gold or shares?

chart showing gold performance versus shares


Source: CMC Markets Stockbroking

It was close for most of the year. But from mid-November shares (pink line) took off while gold went the other way.

And although there’s a chance this performance could reverse by this time next year, there’s just as good a chance that shares will do even better than gold.

But just because gold has an average year, it doesn’t mean it’s a bad investment. In fact, last week we bought a bit more for our retirement fund. It’s something we like to do every three months or so.

And to be honest, we don’t even try to time our entry points. (Although Dr Alex Cowie says that it’s now a pretty good time to buy due to the ‘golden cross’ on the gold price chart).

As soon as we’ve got some spare cash we’ll put in an order to buy another one or two ounces. It’s simple. And because it’s a long term investment (or insurance policy) that’s another reason we don’t pay much attention to the price.

How you buy gold is up to you. You can buy the physical metal through a bullion dealer (or even off eBay!) or you can buy the Gold ETF [ASX: GOLD], so you can buy and sell it just as you buy and sell shares.

The ETF is a great way to get used to buying and owning gold. But eventually you should upgrade to owning physical gold and storing it somewhere safe, such as in a safety deposit box.

But back to the point we made at the top of this letter…

Buy at the ‘Bottom’

We think most folks have missed the point about Germany’s gold repatriation. Keeping the gold on its own soil is only half the story. The other half is that Germany knows it will need to use the gold as collateral. Why? Because it’s fighting tooth and nail to hold power over the rest of Europe.

You can see how nervous Germany is about European instability. As the Guardian reported this week:

‘One of [German chancellor] Angela Merkel’s closest allies has warned [UK prime minister] David Cameron not to try to blackmail the rest of Europe. The prime minister was also told a UK referendum was a high-risk option that might paralyse Europe and end in economic disaster for Britain.’

Heaven forbid that the British should get to decide their own future. No, let the Germans decide…or the Americans. As the Financial Times notes:

‘The Obama administration on Wednesday publicly signalled its growing concern about a possible British exit from the EU, just days before David Cameron sets out plans for a referendum on the issue.’

We’re at the stage where no government can keep its nose out of other government’s business.

But the bottom line is the fate of the UK’s economic future isn’t really what frightens Germany or the US. What really frightens them is the probability that a British exit would mean the end of the pan-European experiment.

And without pan-European government, it means the end of German dominance, the end of the euro, and a return to national currencies. If that happens, global investors will need a lot of convincing to risk buying national currencies. They’ll naturally look to the currencies with the strongest foundations.

Look at Exter’s Pyramid again. The strongest currency will be those with gold at the base. That’s why Germany wants the gold on German soil. But rather than betting on which bank notes to own, there’s a better solution.

Just buy what’s at the bottom of the pyramid – gold. That’s why we buy gold and why it should be a key part of every investor’s portfolio.


PS. We’re not the only one questioning Germany’s motive. Check out Matthew Partridge’s article on The Real Reason Germany Wants its Gold Back.

From the Port Phillip Publishing Library

Money Morning is Australia’s most outspoken financial news service. Your Money Morning editorial team are not afraid to tell it like it is. From calling out politicians to taking on the housing industry, our aim is to cut through the hype and BS to help you make sense of the stories that make a difference to your wealth. Whether you agree with us or not, you’ll find our common-sense, thought provoking arguments well worth a read.

Money Morning Australia is published by Port Phillip Publishing, an independent financial publisher based in Melbourne, Australia. As an Australian financial services license holder we are subject to the regulations and laws of Corporations Act and Financial Services Act.

Money Morning Australia