Gold: People either love it or hate it here are the 4 myths

Gold: People either love it or hate it here are the 4 myths Gold: People either love it or hate it here are the 4 myths Review by: Umer Idrisi 5.0 stars based on 01 Review Many in the investment community trot out the old myths about gold: that it is a bad investment; that it is very risky; that it is not a ... Gold: People either love it or hate it here are the 4 myths
Gold. People either love it or hate it here are the 4 myths
Many in the investment community trot out the old myths about gold: that it is a bad investment; that it is very risky; that it is not a good inflation hedge.

It is because of these myths that gold is still undervalued.

Once the general public realizes these beliefs are not valid, the price of gold will be much higher.

MYTH 1: GOLD IS A BAD INVESTMENT

A frequently cited argument is that since it peaked at $850 per ounce (all amounts in U.S. dollars unless otherwise noted) in 1980, gold’s return has been poor compared to the major stock indices.

However, that peak price was a short-lived, single-day aberration. Investors who avoided the mania phase and purchased gold one year earlier in 1979 at its average price of $306 per ounce also avoided any significant losses during the subsequent bear market. The performance of different asset classes varies from cycle to cycle.

The previous cycle from 1968 to 1980 saw the Dow Jones Industrial Average remain flat with significant volatility, while gold increased by 2,300 percent. In the current cycle, which began in 2002, gold has posted a compounded return of 14 percent, while 15 of the 30 Dow components are negative.

MYTH 2: GOLD IS NOT A GOOD INFLATION HEDGE

The arguments against gold as an inflation hedge are usually based on calculations arising from the intra-day price spike in 1980. While gold did not keep up to inflation using daily prices from 1980 to 2002, the annual average gold price has kept up extremely well since 1971, when the price was no longer fixed.

During the same timeframe, the U.S. dollar lost about 80 percent of its purchasing power. In fact, all the world’s major currencies have depreciated by significant amounts due to continuous excessive increases in the money supply.

The impact of this devaluation on real returns is significant. Conversely, gold has not only maintained its purchasing power but increased it against all major currencies

MYTH 3: GOLD IS A RISKY INVESTMENT

Risk means different things to different investors. Most investors, however, the associated risk with a loss of their capital or underperformance of their investments in comparison to their expectations. “Risk comes from not knowing what you are doing,” according to Warren Buffett.

There are many kinds of risk: currency risk, default risk, market risk, inflation risk, systemic risk, political risk, interest rate risk and liquidity risk.

While all of these apply to financial assets, many do not apply to gold bullion. Physical bullion is not subject to default risk, liquidity risk, political risk, inflation risk or interest rate risk.

MYTH 4: GOLD DOES NOT PAY DIVIDENDS OR INTEREST

The Bank of England used this argument to justify selling half the country’s gold holdings at the bottom of the market in 1998. It wanted a “safe” investment, one that would generate interest, and it chose U.S. treasury bills.

The gold was sold for under $300 per ounce. In the months following that sale, the price of gold tripled, and the value of the U.S. dollar lost 30 percent against the British pound.

The currency exchange losses plus the opportunity cost resulted in billions of pounds in losses, significantly offsetting any interest income the Bank might have received.

CONCLUSION:

When the public at large becomes fully educated with respect to precious metals, it will bid up the price.

Considering that global financial assets are estimated at over $180 trillion, while total global above-ground gold is only $4 trillion (and above-ground bullion is less than $1.5 trillion), a massive wealth transfer event is likely to occur.

It is interesting to note that even a 10 percent switch from financial assets to gold would result in a 450 percent to 1,200 percent increase in the gold price.