Losing GBP exposed Gold’s ultimate function
GBP’s loss this year has highlighted gold’s function “as a financial insurance and excellent hedge against fiat money and muddled central bankers.”
Physical gold shines best during this kind of epic SHTF currency fails
Week to week, XAUUSD fell hardest this year. It opened on Monday at 1315.50 and closed the week’s trading yesterday at 1257.39, a 4.4% loss. Lowest traded was 1241. In the meantime GBP flash crashed Friday morning for unknown reasons. I have written a short roundup here. Against the EUR, GBP lost 3.83%. Against the USD, it was down 3.91%. At the ‘height’ of the flash crash, GBPUSD was down 7.70% for the whole week.
While these two appeared to be two unrelated movements, GBPXAU presents an interesting setup that gold bugs have been advocating all the time – physical gold as a safe haven when currency fails. I didn’t think that ordinary British foresaw the Sterling Pound’s collapse this year. I didn’t think this thought came to mind on 01 January 2016 for any British ‘my money is going to lose so much of it’s purchasing power’.
More than 15 years ago, a cousin of mine went to UK to study. At that time I remember the GBPSGD exchange rate was 2.9 – 3.0. GBPSGD is doing around 1.7 right now. This is a nearly 50% loss in value in the GBP.
Here’s a chart and this is what it says:
- Gold price was up against GBP by ~1.4% since beginning of September and down slightly by 0.8% since beginning of October.
- Gold was up against GBP on 07 October which is the day GBP crashed.
- During the same duration, GBP lost ~5.3% against USD from beginning September and ~3.9% from beginning of this Monday.
- This was despite gold price is down against USD and had it’s worst week year to date.
For any UK person holding his wealth and savings in Sterling Pound, his wealth would be protected if he had diversified into another currency as well as to some gold.
Back in 2013, I interviewed Will Bancroft, Co-founder of The Real Asset Company based in the UK. This question and answer came up
Me: What is the main reason for individuals to buy gold?
Will: Different analysts will give different reasons here, but I would urge that gold is the best form of financial insurance and an excellent hedge against fiat money and muddled central bankers. Gold is the most ultimately liquid financial asset out there, without credit risk or counterparty risk. It is a unique form of liquidity that retains its purchasing power over the long term.
Back in 2013 I also wrote this story ‘Why should individuals invest in foreign currency‘ which I related a piece of news on the Iranian economy. I don’t have the link to the original news anymore but Iran was being sanctioned and it’s currency was not doing well. Reported in the Arab Times on 06 February 2013, there was this segment
The Iranian gold rush was mainly driven by fears about the domestic economy, particularly the risk of soaring inflation and a wobbly currency…
The reasons that people are drawn to these safe assets — gold coins and hard currency — are firstly a limited choice of investment opportunities, and secondly a fear from the weakness of the national currency,” said an economist… These are results of more potential economic instability in the country.”
I cannot help but be amazed when I see gold bugs being ridiculed – that gold is a barbaric relic and generates zero return. Zero return might be true but I think that when disaster strikes, return is the last thing one has in mind. This is where gold shines – that it is the ultimate liquid financial asset that has no credit risk, no counter-party risk. With the kind of environment that we are going through right now i.e. undisciplined easing/money printing, zero to negative rates, risk of systemic bank failures poised by elements such as Deutsche Bank, gold holders might be getting the last laugh.
I would urge that gold is the best form of financial insurance and an excellent hedge against fiat money and muddled central bankers.