There is a plethora of information available in all sorts of media that is negative about gold – gold is risky, volatile, a barbarous relic, and so on – but these arguments miss the point entirely, because they treat gold as an investment. To fully understand gold’s role in an investment portfolio, we need a new mindset—a gold mindset – [and HERE it is].
The above edited excerpts, and the copy below, are from an article* by Nick Barisheff (bmgbullionbars.com) originally entitled Is Gold a Bad Investment?.
Simply put, gold is not a good investment or a bad investment. Gold is not an investment at all: Gold is money. Once we understand this, we can see gold as the portfolio-diversifying, wealth-preserving asset that it actually is.
Three things tell us that gold is money, and not just a commodity:
- Gold (as well as silver and platinum) is traded on the currency desks of the major banks and brokerage houses, not the commodity desks;
- the world’s central banks hold gold as reserves, and they have been net buyers since 2009;
- and the turnover rate between LBMA members is more than US$20.2 billion per day.
The definition of “investment” is the commitment of money or capital to purchase financial instruments or other assets in order to gain profitable returns in the form of interest, income or appreciation of the value of the investment. Through this transfer of capital, in the expectation of a profit, an investor gives up their capital and puts it at risk. In return, the investor receives dividends or interest as compensation because their capital is at risk; they may get back less than they invested, or they may get back nothing at all.
In contrast, physical gold bullion or physical paper currencies locked in a vault are not invested; they are simply being stored. Since neither is invested, they don’t earn interest or dividends, but gold doesn’t have any counterparty risk.
- Paper gold certificates,
- unallocated bullion accounts,
- shares in gold mining companies
- and futures contracts.
All the above have counterparty risk, and are either someone else’s promise of performance or someone else’s liability. They may have their place in a portfolio, but they are not bullion and they are not money. We hold physical gold for the benefits it offers as money.
Holding bullion in a vault means:
- there is no investment, so there is no risk of getting back less gold than was initially deposited, and there is no risk of the gold’s value falling to zero;
- there is no need to be compensated by way of interest or dividends, as there is no risk to capital and
- there is also no long-term risk of losing purchasing power.
Both gold and currencies can easily be taken out of the vault and given to someone else in return for dividends or interest but the investor who gives up their gold or currency risks not getting it back. Since gold maintains and even increases in purchasing power over time, there is no need to put it at risk in order to earn a minimal amount in interest or dividends.
Figure 1 demonstrates how gold has not only preserved but also increased its purchasing power from 1971, when the gold standard was cut, to 2015.
Fiat (paper) currency held in a safe, however, loses purchasing power every day, because its value is eroded through inflation. Currency, then, must be invested in an attempt to offset this depreciation.
Fiat currency held in a bank account is also an investment, as it is more accurately described as a loan to the bank in return for marginal interest. This rate of interest never matches the rate of decline of the currency’s purchasing power. Furthermore, cash stored in a bank account is highly leveraged by the bank, which keeps only a small percentage on reserve while lending the majority out. This is the foundation of modern commercial banking.
Cash Is NOT Money – Gold IS Money
We need to define what role money serves, and why cash is not money.
Money must be:
- a medium of exchange,
- a unit of account
- and a store of value.
Cash satisfies the first two requirements, but fails to satisfy the third.
- Gold is a medium of exchange.
- Gold is a unit of account.
- Gold is a store of value.
- Gold IS money.
We hold physical gold for the benefits it offers as money.
*>> Click to read more (http://bmgbullionbars.com/is-gold-a-bad-investment/)
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