Gold Has Always Been, and Always Will be, the Ultimate Currency

currency and paper money of Australia

US stocks continued to grind higher overnight, while European shares pulled back slightly. Oil fell, while gold was steady.

In short, there’s not much to talk about. Stocks are consolidating their post-Brexit gains. US stocks are holding their record highs. With plenty of scepticism about the recent rally hanging around, it makes me think it will continue for some time yet.

And while the Aussie market is nowhere near its all-time highs, it is looking much stronger than it has in a long time. Let’s have a look at a chart of the ASX 200 to show you what I mean:

Source: BigCharts
[Click to enlarge]

The recent break above 5400 points looks pretty bullish to me. I’ve drawn a green line to denote this level. As you can see, in July 2015, this was an area of support. But in August, the market sliced through here on concerns about China’s yuan devaluation.

Then, in November 2015, the market rallied all the way back to exactly 5400 points, before selling off sharply again. This level had become an important resistance point.

The ASX 200 then spent six months languishing below here, before making another attempt to break through it in May and June this year. But the resistance level held, and the market fell again.

Then Brexit came and went. Punters panicked at first, but quickly realised that it simply meant more central bank support for markets. That caused banks AND resource stocks to rally together, a condition crucial for the Aussie index to make new highs.

That’s what happened last week. The ASX 200 broke out above resistance, at 5400. Whether you agree with it or not, this is a bullish sign. It tells you the economy is stronger than most people think, and that earnings will surprise on the upside…or it suggests the economy is just as weak, if not weaker, than expected, and that the RBA will keep on cutting rates this year.

It could also reflect the initial signs of global inflation (as in, the inflation of goods and services) emerging after years of extraordinary monetary policymaking.

Either way, the recent breakout is a bullish development, and you’d have to think stocks are going higher from here, at least over the short term.

Maybe the prospect of rising global inflation is behind gold’s move higher this year? As you know, I’ve been talking about gold a bit lately. I think it’s a great long term opportunity for investors.

But it’s not a topic I’ve recently stumbled upon. As readers of my advisory, Crisis & Opportunity, would know, I’ve been following gold closely since January 2015. That’s when I first highlighted the emerging opportunity in Aussie gold stocks.

But some of you don’t understand why I keep talking about it. Admittedly, gold is a polarising topic. To some, the idea of owning gold makes no sense. For example, I received this email yesterday from a dear reader:

Dear Greg,

I read your articles regularly and I can’t understand why you keep “selling” physical gold as a major part of an investment portfolio. To me physical gold is an above average risk asset which is driven more by emotion than fundamentals.

Warren Buffet once said that buying gold is a short cut to the poor-house. Maybe it is, but that’s not the point. The point is physical gold fails the investment test – it doesn’t produce a dividend, it offers no franking credits and any capital gain is effected by forex currency whims and US monetary policy. Apart from that. outside jewellery, gold has very little industrial use or value.

Surely in this day and age of Brexit and its effect on the future of the UK, the survival of the EU and the uncertainty of political change are all more relevant than what the price of gold might be next week and whether it’s in a bull market or not. I also note that Newcrest is underperforming the XAO.

Maybe Warren’s right, but in the meantime keep up the good work.

Thanks for the email. You raise some good points. Let me try and give you a good response.

I advocate gold ownership because I consider it an important part of a diversified portfolio. With bond yields at record lows, stock prices around the world at, or near, record highs, and cash yielding nothing after inflation, it makes sense to hold some gold in your portfolio.

Gold is certainly volatile. But does this make it an above-average risk asset? I note that gold priced in Aussie dollars is just below record highs right now. The ASX 200, on the other hand, is some 20% below its 2007 peak.

Does this mean stocks are riskier than gold? No, it doesn’t, but it does tell you that owning gold throughout this time would have improved the performance of your portfolio, making it less volatile in turn. That’s a good thing.

And as far as emotions versus fundamentals go, show me one asset class that doesn’t come under the influence of emotions. The stock market is a reflection of human nature. And humans are emotional beings. Don’t believe any economic theory that says humans or markets are rational. They aren’t.

On your point about Buffett. I know Warren isn’t a fan of gold. You can’t compound your wealth by owning gold — and compounding is the key to Buffett’s huge wealth accumulation. I respect his view.

But consider that — thanks to insane global central banking policies — there are now more than US$10 trillion worth of bonds around the world trading on negative yields. That is, it costs you to own them. And consider that the world’s major currencies are engaged in a stealth currency war. The aim of this war is to steal demand from competing trading blocs by reducing currency values.

So the fact that gold doesn’t have a yield — and produces no franking credits — isn’t a big deal. Presumably, you’ve got a big chunk of your portfolio allocated to stocks, which should satisfy your demand for yield. But you shouldn’t be 100% invested in stocks.

As I’ve explained here previously, gold is a currency. Currencies don’t yield anything…not if you think of currency as physical notes in your wallet. Currency only has a yield when you put ‘money’ in a bank. That’s because the bank uses your money for other purposes, and pays you a pitiful amount of interest for the privilege.

Gold is rising in price in all currencies because currencies are losing value. Gold is one of the few universal stores of value that tells you the real story.

For example, I mentioned that gold in Aussie dollars is trading just below record highs. That’s a reflection of how much purchasing power our currency has lost over the years.

Just about everyone in Australia knows how expensive a place it is to live in. Housing, health, education, food, beers…you name it. But to tourists from many countries, our prices are simply crazy.

We’re fed the lie that prices are high because we are a prosperous nation. That’s true to an extent, but prices are high because of the falling purchasing power of the Aussie dollar.

The near record high price of gold tells you that. When it comes to currency devaluations, you can’t fool gold. One Aussie dollar now buys you the least amount of gold in its history. What does that say about our dollar’s purchasing power?

You can’t consider gold without the other side of the equation — and the other side of the equation is currency. So when you say that Brexit and the future of the European Union are more important considerations than whether or not gold is in a bull market, you’re trying to separate a hip from its joint.

They are bound together! More than anything, Brexit was a currency event. It weakened the pound AND the euro. Gold, an apolitical currency, benefitted from the vote more than anything.

Gold thrives on political uncertainty. That’s because political uncertainty has a detrimental effect on currencies. And gold has always been, and always will be, the ultimate currency.

So I hope you can see that owning gold as a part of a diversified portfolio makes sense…especially in this politically fraught age. And I hope you can see that gold is in a bull market because of the things you mentioned, and not in spite of them.

I invite you to look at my research in more detail, which gives you a number of ways to profit from what I see as an ongoing bull market in gold. Or, if you’d prefer, an ongoing bear market in fiat currencies, political discourse and leadership, and general economic management by the global ‘elite’.

You can click here to read more.

And finally, before I go: Newcrest [ASX:NCM] has more than doubled in price over the past 12 months. The market, in contrast, has done nothing.

In recent days Newcrest has corrected lower. This is an entirely normal move after such a strong run.

If you read my special report on gold, you’ll get specific ways to play this correction.


Greg Canavan,
For The Daily Reckoning

Greg Canavan
Greg Canavan is the Managing Editor of The Daily Reckoning and is the foremost authority for retail investors on value investing in Australia. He is a former head of Australasian Research for an Australian asset-management group and has been a regular guest on CNBC, Sky Business’s The Perrett Report and Lateline Business. Greg is also the editor of Crisis & Opportunity, an investment publication designed to help investors profit from companies and stocks that are undervalued on the market. To follow Greg's financial world view more closely you can subscribe to The Daily Reckoning for free here. If you’re already a Daily Reckoning subscriber, then we recommend you also join him on Google+. It's where he shares investment research, commentary and ideas that he can't always fit into his regular Daily Reckoning emails. For more on Greg go here.

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