Why Gold’s Not Worth the Paper It’s Written On

There’s a lot of chatter out there at the moment about an impending gold price breakout.

The ever-bullish gold bug crowd see opportunity everywhere they look.

Political risk — check.

Interest rates on hold — check.

Market fear — check.

There’s no question conditions certainly feel right for the traditional safe-haven asset. And timing wise, the price move on Friday was particularly bullish. As you can see below:


MoneyMorning 30-01-19

Source: Incredible Charts

[Click to open in a new window]

That’s a strong breakout candlestick (the blue bar at the end) right there.

If it can continue moving up and break US$1,380, that will be a three-year high.

Even better for Australian investors is the fact that the Australian dollar is getting weaker. Which makes the gold price even better in Aussie dollar terms.

So, should you be loading up on gold right now?

Maybe…

But I’m afraid it’s not as simple as that…

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Not your vault, not your gold

These days when you want some exposure to a particular asset class, the most common way to do it is to buy into an Exchange Traded Fund (ETF).

ETFs are great. They give you a cheap and easy way to invest in a diversified pool of assets relating to a particular asset or theme.

And you can do this to invest in gold too.

The SPDR Gold Trust ETF which operates under the ticker GLD is one such fund. It seeks to reflect gold bullion price performance by issuing shares backed by physical holdings of the precious metal.

The bars are held at HSBC’s vault in London.

But this could be a problem for you.

You see, unless you’re physically holding your own gold, there’s the chance that you can never actually gain possession of your gold should you need it.

And in actual fact, the terms of the GLD ETF specifically do not allow you to take physical possession.

Which makes you think…

What are these paper promises actually worth in the case of a real economic emergency (the very reason you would consider investing in gold!)? Can you trust the custodians of your gold to honour their word?

I’m not so sure.

This fact was laid bare just last week.

Nicholas Maduro — the embattled President of Venezuela — made a last-ditch attempt to withdraw US$1.2 billion worth of gold from the Bank of England’s vaults.

The Bank of England blocked the transfer.

Now whatever you think of Maduro and the turbulent politics of that country, you’ve really got to be a bit nervous about the fact that the Bank of England can legally deny rightful withdrawing of someone’s — or some country’s — funds.

But don’t think this only happens to despotic regimes…

To truly own gold you have to have physical possession

In 1933, in the Great Depression, President Franklin D Roosevelt issued Executive Order 6102.

The order prohibited the private ownership of gold.

And there were serious repercussions if you failed to obey. From Wikipedia:

Executive Order 6102 required all persons to deliver on or before May 1, 1933, all but a small amount of gold coin, gold bullion, and gold certificates owned by them to the Federal Reserve, in exchange for $20.67 (consumer price index, adjusted value of $400 today) per troy ounce.

Under the Trading with the Enemy Act of 1917, as amended by the recently passed Emergency Banking Act of March 9, 1933, violation of the order was punishable by fine up to $10,000 (equivalent to $193,548 today) or up to ten years in prison, or both.

Even though this law was repealed in 1974, most physical gold in the system has since been hoarded by governments, be it the US, UK, Russia or China.

The gold us ordinary people are mostly allowed to access is ‘fake gold’. Like our paper system of money, it’s built on a system of trust.

With central powers lying at the heart of it all. This ‘fake’ gold market is worth $7 trillion.

The fact is, if history is any guide, gold isn’t worth the paper it’s written on. Most of the people who think they own gold actually own diddly squat. Because in a real economic emergency, I think there’s very little chance you’ll be allowed to take ownership of your gold.

To truly own gold you have to have physical possession of it.

But that of course brings its own headaches.

Storing, insuring, keeping it safe…and even if there was an economic meltdown how would you spend parts of your gold block? Would you melt it down into coins? That’s not so easy to do.

Luckily there is an emerging alternative to gold.

A way to truly own an asset outside the existing corrupted financial system. It’s easy to buy, easy to store, easily divisible, and out of the reaches of interfering regulators.

If you like gold, you should love this.

I’m talking about bitcoin.

So today, I advise you to put aside any preconceptions you may have. And instead start investigating bitcoin as a modern-day form of gold.

I think the smart investor will find space for both physical gold and self-owned bitcoin in their portfolio right now…

Good investing,

Ryan Dinse,
Contributing Editor, Money Morning

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Ryan Dinse is a contributer at Money Morning. He has worked in finance and investing for the past two decades as a financial planner, senior credit analyst, equity trader and fintech entrepreneur. With an academic background in economics, he believes that the key to making good investments is investing appropriately at each stage of the economic cycle. Different market conditions provide different opportunities. Ryan combines fundamental, technical and economic analysis with the goal of making sure you are in the right investments at the right time.  


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