Rudi's View: Gold Is Insurance
(This story was first published on Wednesday, 21st March 2012. It has now been re-published to make it available to non-paying members at FNArena and to readers elsewhere).
By Rudi Filapek-Vandyck, Editor FNArena
Last week I attended day one of the conference "After America", organised by Port Phillip Publishing in Sydney. As I expected, the event turned out one long doom-and-gloom fest with presenters on stage talking about "the unsustainability of central bankers printing money out of thin air", about "the eventual collapse of the global financial system", and about "the mass-destruction of public wealth around the globe". I am sure you get the idea.
Star presenter of the day was Scotsman Dylan Grice who alongside Albert Edwards sits on Societe Generale's Alternative Strategies desk where both publish "naughty" forecasts such as that the eurozone won't be with us forever and that the GFC and subsequent global policy responses have "Japanised" global equities in the longer run.
The next day I flew to Perth to present at the Trading and Investing Expo over the weekend. Such events always bring together a higher than usual concentration of investment experts and investors who want to talk about/hear about the next bull market. Suffice to say, finding a bigger contrast as between both events would be a very tough ask.
Yet, both events had a few striking characteristics in common. Contrary to what one might expect, presenters at "After America" did not advocate investors put all their money in precious metals, buy tinned food, gallons of water and guns and lock themselves up, waiting for Armageddon to eventually announce itself. General advice for investors on the day was to invest differently, like in solid, wealth-preserving, high quality companies. One presenter juggled a few balls on stage and explained the power and tricks of dividend accumulation. This was quite funny as it led to attendees approaching me during the coffee break, declaring: Hey Rudi, they've stolen your dividend strategies!
The title of my presentation in Perth was "Strategies for (investment) climate change", so on the west coast it was me who advised investors should change their investment approach. And yes, solid dividend payers and "all-weather performers" certainly were at the core of what I had to say.
There was a lot of talk about gold on Thursday. I briefly spoke about it during my presentations. On both occasions this triggered that same question I have now heard being asked again and again and again ever since global equity markets sold off in late 2007: how much of an investment portfolio should be in gold? The answer on both occasions was the same: depends on what you want and on what your personal risk appetite is. On both occasions, I could see on faces in the audience, it left investors dissatisfied, if not disappointed.
So here's me trying to do a better job. How much gold should be in your average investment portfolio?
Let me start by saying that I both agree and disagree with both critics and supporters of gold. I do not believe treating gold as an "investment" is the best way forward and I do note the statistical correlation between the price of gold bullion in USD and share prices of Australian gold producers is 86% NEGATIVE. Someone else did the calculations, but I remembered it because it proves why it has been so difficult for investors to play the gold theme through the Australian share market. And yes, Warren Buffett is correct in that gold is intrinsically a non-productive asset. It doesn't generate any income, pays no yield and if you own lots of it in physical form, you'll incur lots of costs from storage and security. The alternative is: sleepless nights.
I do firmly believe every investment portfolio should contain some gold and/or silver. Not as an investment, but as "insurance".
If there ever was a time in history when the Chinese curse "may you live in interesting times" applies, then surely our present era would be a prime candidate. Bad news does not only happen in the past and we are still en route to finding out what modern history's largest experiment ever by the world's central bankers ultimately will lead to. Bernanke, Draghi, Sir Mervyn King and their peers in Tokyo and Beijing might be confident about their modern day monetary experiment not ending in disaster, but that comes with the job description: to exude confidence. It doesn't mean much when they are trying to sail us all through unprecedented times and challenges.
How much should you own? That depends on factors such as "how scared are you and over what time horizon?" as well as your financial situation and your personal needs right now and in the future.
I think the best comparison to make is with life insurance. It is a statistical fact that people who take out life insurance at young age and live to grow old, end up paying much more than the benefits their family ultimately receives. It is thus in the life insurers best interest to have everyone scared as and be able to collect monthly fees many years ahead of the last breath. Whether and when someone takes out personal life insurance then becomes a personal risk assessment. How scared am I? What are the odds? Am I healthy and strong? Do I have children? A young family? What are the potential financial implications?
Personally, I have probably lived longer without life insurance than most of you, readers of this story. I only took up life insurance last year (if my memory serves me correctly). Some among you might find that "reckless" because no matter how young I was and felt, death could have awaited around every unsuspecting corner. I know. Which is why taking up life insurance is a personal assessment. Same as with owning gold and silver.
At times, when I try to explain the principle of "insurance" through gold and silver, my words trigger the response: but what if gold falls in price? I'll lose money!
Yes, I then say, but that's exactly the point. If you insure your house you don't want it to burn down. You want to live in it for many, many years until you eventually sell it or die. Just before you do any of these two options, you can look back and consider all that money you have lost through paying all those monthly fees in insurance. All money lost. Which is a good thing, because it means you have lived in your precious asset all these years.
Insurance is for something you don't want to happen. Which is why I always caution to not overshoot with allocations to gold and silver. In the end, you don't want to own so much of it so that it becomes self-interest to hope for the world to go down the drain and for the global financial system to collapse.
I have no desire to die sooner since I started paying for my life insurance. I hope I won't need it - ever (though I do realise, that's a big call). I have no intention to -one day-