The Importance of Owning Gold in Case of a Financial Collapse

Adam Barratt
May 13, 2015

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Since the dawn of the new millennium the world has been in a constant turmoil. We are currently in a period of remarkable economic and financial volatility, experiencing the deepest recession since the 1930s and unforeseen declines in the value of many financial assets. Investment options that used to be considered as the 'safest' are now completely unpredictable. Quality mortgage-backed securities and 'well-performing' stocks can no longer be trusted.

Against this background, however, gold has performed optimally in terms of value. It has been doubling its initial price since the global financial crisis of mid-2007. Gold's outstanding performance in this period has led to a re-evaluation of its value characteristics as a financial asset and led some investors to revisit its proper place in their portfolios.

As a quality asset, gold is relatively immune to inflation, financial crises and credit defaults. It has been used for centuries by individuals that wanted to protect their wealth in case of economic collapse. Nowadays the world economy is concerned over sovereign creditworthiness. Other imperative issues include the consequences of loose monetary policy including quantitative easing on medium-term inflation, and the possible effects of a so-called 'Grexit' in the Eurozone. The future of the US dollar as a reserve currency, coupled with the ongoing economic power shifts from the western countries to the ever-expanding economies of Asia fall into the long term structural issues that trouble investors.

Studies show that precious metals are among the few asset categories with a positive correlation coefficient with inflation. From a strategic perspective, investment banks determined that portfolios enjoy reduced risks with the use of such assets. Improved returns range from a 7-15% compared to non-gold hedged portfolios.

In a study of utmost importance the respected independent research firm, Wainwright Economics, says that gold is the most accurate predictor of rising inflation. Their research demonstrates the fact that gold is the most efficient protection against inflation shocks and that it is an effective inflationary hedge when used in harmony with other inflation shields.

The firm's research shows that measures like the Consumer Price Index (CPI) and oil are poor predictors of inflation compared to gold. In such volatile times of extreme events and economic shocks gold is established once again as the superior hedge. It minimizes investment risk, providing reassurance to considerate investors around the globe.

The performance of gold in a deflationary environment never disappoints either. There is a collective misunderstanding around the fact that gold is not a healthy investment during periods of deflation. This is erroneous as was clearly seen in the Great Depression of the 1930s. At the time, the dollar that was backed by gold (conversely to our modern floating currency monetary status quo) was suddenly devalued and gold revalued overnight by Roosevelt from $20.67/oz to $35/oz. Notable is the fact that in this period the Dow Jones fell by 90% from peak to gutter and property prices fell by more than 50% in the early years of the Great Depression.

Historically, its widespread use as a means of transaction and store of value has been heralded multiple times. Apart from the famous example of the Great Depression, unfortunately - for some of us - we witnessed its 'magical,' risk-crushing ability in recent years. The ones who were smart enough remained protected, while the world took major hits.

Gold's undisputable value as an important currency and monetary reserve remains today. Most central banks, together with the International Monetary Fund still consider gold as the only reserve asset incapable of being classified as a liability.

This means that, unlike a currency, the value of gold cannot be affected by the economic policies of the issuing country or undermined by inflation in that country.

Much like the situation experienced by Japan in the 1990s, the scenario of complete economic collapse is characterised by global financial shocks that force markets to a very undesirable rollercoaster ride.

One of the major trends of the past few years is the ever-increasing amount of individuals who invest in gold and other valuable metals globally, in order to protect themselves. Simultaneously, central banks around the world are accumulating gold on an unprecedented scale: they became net buyers of gold since 2008 (which was coincidentally the year that the debt crisis spun out of control).

Wise investors shall learn from this trend. The main theme here is that we are moving back to one of the fundamental usages of gold & silver: the precious metals protect your wealth and your purchasing power. Consider the fact that with gold, you will be able to afford the same amount of goods or services (or probably even more) in 5-6 years' time. Currencies are proven to devalue overtime, hence you will probably lose a considerable part the value of the currency you own, which means you will be able to buy less of the same services or products in the near future.

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