Gold as an investment alternative is garnering renewed interest among retail investors, especially as rising concern about de-dollarization is prompting a search for non-correlated assets bereft of counterparty risk. Billionaire hedge fund manager John Paulson recently underscored this concern when he advised his investors they were better off owning gold.
The global financial stage is experiencing notable shifts, and the shadow of de-dollarization, the reduction in reliance on the US dollar for international trade settlement and reserves is increasingly becoming a matter worthy of retail investor’s attention. The shift has sparked interest in the search for alternative investment strategies, those that will safeguard against potential currency volatility and depreciation brought about by the spectre of ever increasing de-dollarization.
Well before 1843 when Charles Dickens wrote the famous phrase in a Christmas Carol, “as good as gold” it had established an enduring legacy as a store of value and a hedge against inflation. It has historically been viewed as the safe-haven asset of choice. Its intrinsic value has remained resilient over time due to its limited supply and global demand. Traditionally, during periods of economic uncertainty, geopolitical instability, and currency devaluation, gold has attracted higher demand, driving prices upwards. It is little wonder that over the last year the price of gold has increased from $1,620 to $2500 per troy ounce, a leap of 54%. This has been driven in large part by a buying spree from Central Banks, notably China, Russia and India but many others. In the case of the Peoples Bank of China, funded by the sale of its US debt securities, orchestrated specifically to induce de-dollarization.
This makes gold a compelling hedge against the uncertainties associated with de-dollarization. As de-dollarization infers the decline in the dominance of the US dollar, it will lead to increased volatility and risk in currency markets. Gold, traded globally and valued in various currencies, often appreciates as the dollar depreciates, offering investors a counterbalance to losses in dollar-denominated assets.
Yet despite its historical merits, the decision to invest in gold requires a nuanced understanding of its pros and cons. On the positive side, gold maintains its purchasing power over time and serves as a reliable store of value. It offers investors diversification benefits by reducing overall portfolio risk exposure due to its low correlation with traditional equity and bond markets. Additionally, gold is highly liquid, easily traded in global markets, and tangible gold in the form of bars and coins provides a sense of security that digital or paper assets lack. The benefits that prompted the legendary JP Morgan to astutely remark “Gold is money. Everything else is credit."
However, gold also has some drawbacks. Firstly, it does not generate any income, such as interest or dividends, unlike stocks or bonds. In a low-inflation environment. This lack of yield can be a disadvantage. Secondly physical gold also incurs costs related to secure storage and insurance. Moreover, gold prices can be volatile in the short term, influenced by macroeconomic factors and market sentiment. This volatility can make gold investments speculative, sometimes driven more by market trends than intrinsic value.
Nonetheless, when evaluating investment alternatives, retail investors have only a few good options to consider. Cryptocurrencies, for instance, offer high returns potential and are increasingly recognised as digital gold due to their decentralised nature. However, they are extremely volatile, face regulatory uncertainties, and carry security risks. Alternatively holding a basket of foreign currencies can hedge against dollar depreciation, but this strategy demands significant knowledge and is subject to geopolitical and economic vulnerabilities in the respective countries. Real estate can also present an appealing tangible asset with potential for appreciation and rental income, but it requires substantial capital, is illiquid, and sensitive to market and interest rate changes. Other commodities, like oil or agricultural products, can provide some diversification and demand-driven price appreciation, yet are highly volatile and pose storage challenges. Investing in equities in emerging markets might offer exposure to fast-growing economies with the potential for high returns, but they entail greater risks, currency volatility, and geopolitical issues.
Given these alternatives, gold remains a prudent choice, though it should be part of a diversified portfolio. Retail investors should allocate a modest portion, typically around 15-20%, to gold investments to hedge against uncertainty while pursuing growth through other asset classes. This famously led Ray Dalio the founder of hedge fund Bridgewater Associates to astutely remark “… If you don’t own gold, you know neither history nor economics..." Various forms of gold investments such as physical gold, gold exchange-traded funds (ETFs), gold mining stocks, and digital gold offer differing risk-return profiles and operational conveniences. Physical gold, for instance, requires storage and insurance, while gold ETFs provide easy trading and lower fees.
Cost and tax implications are important considerations when deciding to make an investment in gold. Storage, insurance, and transaction fees can add up, impacting the net returns. Moreover, understanding the tax treatment of gold investments is crucial as capital gains and other taxes can influence profitability. It is also advisable to enter gold investments during periods of economic stability to gain better entry prices, and employing strategies like dollar-cost averaging can mitigate timing risks.
Staying informed about global economic indicators and trends is essential when considering investing in gold. Monitoring factors such as inflation rates, central bank policies, and geopolitical tensions will help in making informed decisions about adjusting gold allocations within one's portfolio. This approach helps in using gold effectively to fortify against the turbulence potentially caused by shifts in the global financial order.
Gold represents a viable investment alternative for retail investors concerned about the impacts of de-dollarization. Its historic role as a store of value, its ability to hedge against currency risk, and its characteristic as a safe-haven asset underscore its merits. However, gold should not be viewed in isolation but rather as a part of a diversified strategy. Balancing gold with other investments like equities, bonds, real estate, and possibly cryptocurrencies ensures a comprehensive defence against the uncertainties linked with de-dollarization. Through diligent decision-making and strategic portfolio management, gold can play a pivotal role in preserving wealth and providing stability for retail investors in a changing global financial landscape.
Perhaps the most compelling argument for investing in gold is the sale of it. In 1999 then Chancellor Gordon Brown decided to sell off 395 tons of the UK’s gold holding at $275 per ounce. At current prices a loss of over $30 billion to the UK treasury, it is difficult to find a more calamitous transaction anywhere. In a world characterised by fluctuating markets and volatile currencies, gold remains the quintessential haven, ensuring that investors can weather financial storms with confidence and resilience.
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