Gold's reputation as a safe haven has taken some damage over the past several years, but its recent performance suggests that the yellow metal has performed precisely that function of late. While the stock market has been slapped around in the fourth quarter, many investors have turned to gold -- and I think you should, too.
I know, you're about to tell me that gold is down for the year. That's true. However, while the S&P 500 has lost roughly 17% over the past three months, physical gold has picked up a tad more than 4%.
Here's my take:
The U.S. Dollar
A long position in gold is by definition a short position in the U.S. dollar, and the greenback has gained strength all year long.
The dollar has risen as the Federal Reserve made efforts to normalize monetary policy while much of the rest of the planet has been far slower to get into that position. You;d think that'd be bad for gold.
But year to date, gold has easily outperformed the S&P 500, falling just 5% instead of the S&P 500's 10% YTD drop.
Going forward, what's most interesting to me are these four questions:
- Who would stand to gain the most should the dollar experience some decline in value as the global reserve currency?
- Should world trade ultimately rely less upon the petrodollar?
- Should a centralized cryptocurrency emerge with the support of several of the planet's central banks? (They could force taxation in the form of negative interest rates upon savings in this way.)
- Should something akin to the International Monetary Fund's Special Drawing Rights (SDR) rise to the level of a global currency?
Again, I ask, who stands to gain the most if any of the above happen?
The easy answer would seem to be China and Russia, right? Both have made overt efforts to see the dollar replaced in trade deals not involving the United States.
But do you know what? Those two central banks have been adding significantly to their holdings of physical gold.
IMF statistics show that since 2008's fourth quarter, the People's Bank of China has increased its gold reserves to 1,843 metric tons, up from just 600 tons 10 years ago. Similarly, the Bank of Russia's gold ownership has gone from 520 metric tons in 2008 to 2, 036 tons now. (By way of reference, the United States remains the world's largest hoarder of physical gold with 8,965 metric tons in reserve as of September.)
Yes, some claim that a gold-backed currency creates a less-flexible money supply, and no global currency is backed by gold now, nor have any of them been for many years.
Still, the United States appears for some reason to see a need to play "keep away" with bullion while two competitor nations who would benefit from the dollar's contraction have seen a reason greatly increase their gold reserves.
At the end of the day, one only really needs a few things: food, clean water, heat and the ability to defend yourself -- and a method to store value away from the global monetary system. Real estate is one way to do that last thing, but you can't buy food or safe passage with land or buildings. However, you can with gold.
(Editor's Pick. Originally published Dec. 24.)