Nothing is as Permanent as a Temporary Government Spending Programme

Economist Milton Freidman was right about ‘temporary’ government spending. In 1803, the UK government devised income tax as a temporary measure to pay for the Napoleonic Wars. It’s still here! In 1971, President Nixon removed the physical gold backing of the US dollar. He promised in his speech to the nation that it would be temporary and that the move would stabilize the currency. Fifty years later, the US dollar is not only unstable, but it has lost around 95% of its value against gold since Nixon made the announcement!

Meanwhile, since 1971, gold has returned to the investor a gain of approximately 4,457% or an 8% compound annual growth on capital, outperforming the S&P 500 Index of large US businesses over the same period. Gold is a proven hedge against the destruction of the USD’s purchasing power. Since 1971, the history of gold and the case for gold ownership has not been taught in economics classes nor included in MBA or FCA curriculum. It’s as if gold has disappeared from the financial system, when in fact it has never gone away. Whilst he was Chair of the Federal Reserve Bank, Alan Greenspan disparaged gold, but in his book The Map and the Territory 2.0, he admits that gold is the real asset underpinning the international monetary system.

The gold price moves on fear and uncertainty, and since the financial crash of 2009, central banks around the world have been aggressive buyers of gold. China is the world’s largest producer and importer of gold to hedge their position in US Treasuries and the USD. Because they do not file with the World Gold Council, we can only guess at their current reserves, guarded by the People’s Liberation Army under a mountain somewhere in China. Meanwhile the US holds around 11,000 metric tons, which are stored at Fort Knox and West Point. Recently Brazil, Thailand and Russia, along with EU countries like Hungary and Poland, have increased their reserves of gold. Do they know something we don’t?

Investors should own gold as insurance in a long-term investment strategy. If an allocation of 10% to gold declines by 20%, this results in an overall loss of 2%, which is hardly a catastrophe. But if this 10% allocation gains 500%, it will go a long way to protect other risk assets. Since 1971, we have experienced two bull markets (rising prices), during which the gold price gained 2,000% and 700%. Both cycles lasted about ten or eleven years. Currently, we are four years into a third bull market in gold with some six years left to run, if history ‘rhymes’.

Sensible investors own physical gold, avoid any counterparty risk and allocate 10% of their net worth to avoid instability caused by our governments.

Jeremy Blatch TEP
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