Jim Rickards is one of those analysts you should be following, if you’re not already. If you don’t know of him, he’s a geopolitical and monetary expert and the author of the bestselling ‘The New Case for Gold’ book.
He’s just written an article for Money Week, the UK’s top selling financial publication, where he examines “The Case Against Gold”.
You’ll often hear economists, bankers and financial types talking down gold as an investment or that’s it’s even money (they see it as a commodity).
In his article, Rickards pours water on the arguments commonly used by such people, including myths such as gold does not have a yield, that there isn’t enough gold in the world to support the current global financial and monetary system and that gold “cannot support the growth of world trade and commerce because it doesn’t grow fast enough.”
Rickards starts his article by reviewing gold’s recent price history and why it appears to be undervalued now:
|It’s no secret that I am a big believer in gold. But today I want to take a look at the case against gold. Starting from a low of about $250 per ounce in mid-1999, gold staged a spectacular rally of over 600%, to about $1,900 per ounce, by August 2011. Unfortunately, that rally looked increasingly unstable towards the end.
Gold was about $1,400 per ounce as late as January 2011. Almost $500 per ounce of the overall rally occurred in just the last seven months before the peak. That kind of hyperbolic growth is almost always unsustainable.
Sure enough, gold fell sharply from that peak to below $1,100 per ounce by July 2015. It still shows a gain of about 350% over 15 years. But gold’s lost nearly 40% over the past four years. Those who invested during the 2011 rally are underwater, and many have given up on gold in disgust. For long-time observers of gold markets, sentiment has been the worst they’ve ever seen.
Yet it’s in times of extreme bearish sentiment that outstanding investments can be found – if you know how and where to look.
There’s already been a change in the winds for gold so far this year.
Rickards has made a strong case for gold in his book, basing his conclusions on mathematics. While there’s a small finite supply of gold above ground and the amount mined each year is pretty meagre (and dropping), he believes that the explosion in money supply (created through debt creation and Quantitative Easing) means that gold will rise to $10,000 per ounce.
He’s also highlighted the risks of having assets in digital format, be that digital currency (like Bitcoin), digital gold, stocks and bonds or deposits in a bank account. All of these assets have an intermediary between you and them, generally in the form of technology. This creates a counter-party risk; technology can fail, it can be usurped (e.g. banks imposing bail-ins on depositors as is already happening in Europe) or hacked (i.e. your asset gets stolen as in the recent case with the Bitfinex hack where customers lost 36% of their cryptocurrency held there). There could also be liquidity risks; for example if banks impose Capital Controls limiting how much depositors can withdraw daily from their bank).
Cyber Financial Warfare is the single greatest risk in the Digital Age of the early 21st Century. Whether an attack comes from some disgruntled hacker, a cyber-criminal group or one nation attacks another through malware designed to damage or take systems down, your online assets are at risk according to Rickards.
Maybe you think this is all a bit “Conspiracy Theory” stuff and Rickards is a bit of a nutter but it’s not and he’s not. He’s got credentials up the wazoo and has negotiated some very significant deals in his career. It’s worth taking note of what he has to say.
We’ve already seen two high-profile hacks of cryptocurrency exchanges in recent years (there have been other smaller hacks) where hundreds of millions of dollars worth of Bitcoin have been stolen. The Mt. Gox hack in 2014 saw $460 million being stolen and $60 million was stolen in the Bitfinex hack a few weeks ago.
In Cyprus in 2013, the government and banks instituted a forced bail-in. Depositors lost 30% of their savings. On top of that, capital controls were imposed which restricted people to taking out no more than €60 per day from their accounts.
In Greece, following its bailout, capital controls were also imposed restricting what people could withdraw from their bank accounts.
In Ireland, just in the last two weeks, it was announced that bail-ins would be imposed on Corporate account holders by Bank of Ireland. Accounts with more than €10,000,000 will be charged 0.1% to keep their money in their accounts. Ordinary account holders have not been hit yet, but it’s on the cards and the legislation already caters for it. Bail-ins have already also been imposed in other European countries.
So these scenarios that Rickards talks about are not theoretical, “pie in the sky” thought experiments. They’re already happening.
Rickards suggests that owning gold coins and bars protects you, or at least a portion of your wealth, from such events. There is a security risk in keeping gold at home so keeping it in a secure location is a better idea. And if you do buy gold online, make sure the institution you buy from keeps your gold in allocated, segregated storage, such as Bitgold or BullionVault.
Gold will continue to protect and grow wealth in the coming years.