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Why should you invest in gold?

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Protection against inflation and currency depreciation

Since currencies were lifted off their peg to gold in 1971 prices have risen consistently because of inflation. What Nixon then referred to as “The New Economy” is a fiat economy fuelled by consumption and sustained by debt. With real wage growth turning negative in 2008-9 and ongoing currency wars, protecting your wealth from these eroding forces has never been more crucial.

Eroding GBP shown as inverted Retail Price Index (RPI; 2006=100) Average Weekly Earnings (AWE) deflated by RPI.
Source: Office for National Statistics

A long-term investment with big return potential

Besides offering a hedge against inflation and currency depreciation gold has performed well against other types of holdings. Because gold is not producing a yield or dividends we want to stress its importance as being part of a balanced overall investment strategy. 

Gold vs. stocks and property 1971-2015, indexed (1971=100)

In the 44 years since 1971 gold was in a secular bull market for over half the time and between ca 1980-2000 it was trading in a relatively tight range. Heightened geo-political risk and economic instability were prominent in both bull markets and we raise this as the best argument for buying gold. Although we agree that gold has a negative correlation to the US dollar this relationship is asymmetric and changes as we move to a multi-currency world.

Purpose of alternative investments

The purpose of any investment is to give returns and protect downside risk. Being uncorrelated or sometimes negatively correlated to conventional investments, alternatives offer diversification, add stability and minimizes downside risk to your overall investment strategy. We recommend holding 10-20 % in alternative assets, including gold. This will be explored in more detail in another article.

Further diversification and security within this allocation can be achieved by investing in assets that are exposed to several markets, e.g. some collectable gold coins are exposed to both the gold bullion market and the collectors’ market. 

The next article in this series of articles on gold investment will go into more detail in why you should hold physical gold and specifically why collectable gold coin investments could be a better alternative to bullion investments.


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