The fact that bullion investments represent ownership in something real, something tangible, rather than things like claims on cash flows or debt is something that a lot of investors find very appealing.
Of course, it’s natural for those who hold this property of bullion in high regard to overestimate the benefits of this tangibility, where no matter what happens, you will still own your bars or coins, and they will continue to be valuable to some extent. This does mean something but must still be valued as one among many considerations.
In times of crisis, the value of bullion tends to increase, and this is something that would be quite meaningful should we see dire situations. Should the economy collapse, this would result in people looking to move a lot of money, even huge amounts, from other forms of value such as stocks, bonds, and cash, to precious metals.
The thinking here is that paper may be devalued and may lose a lot of value, but bullion still is bullion, and can lose its value but does not tend to during the bad times. You are always left with something with a bullion investment, rather than perhaps losing everything.
Bullion is therefore seen as the ultimate hedge by many people, hedging against enormously negative circumstances where even if the economy and our currencies are in shambles, even if the world itself is in shambles, they see themselves as far better off having at least a good percentage of their wealth invested in bullion.
This is less of a concern given the fact that such collapses don’t come without warning, and one need not take an end of the world approach to investing if the end of the world is at best well on the horizon. Should we experience such a thing of a large magnitude, it won’t be that there will not be time to move our resources more toward bullion as the situation may dictate, and therefore we may at least somewhat question the strategy of preparing now for such events.
There is a real benefit here from a psychological perspective here that we can’t overlook, as if substantial bullion investments provide people with enough peace of mind, this in itself can be meaningful enough to make sense of this for them. Especially among very high net worth investors, whose wealth exceeds their ability to enjoy it practically, this may be seen as a sort of enjoyment in the same way that expensive art is seen to be.
Bullion certainly can be seen as quite beautiful in itself, apart from any investment or practical value, and if one is pleased by owning articles of beauty and refinement, bullion can easily be seen as fitting the bill here.
Bullion as a Hedge against Inflation
Inflation is to some degree the enemy of investing, and this is why just keeping your money in a safe has a negative expectation, where one will lose exactly the rate of inflation each year if the funds are not put to work somehow.
If you just put your money in a bank, they will put your funds to work, but you will tend to get less than inflation, and undergo a loss of some degree. The losses on deposit money at banks are considerably less than inflation, because you only lose the inflation rate less the interest you receive, and these interest rates are pegged to inflation somewhat so as inflation goes up, interest paid does as well.
Some investors only seek to achieve returns which are only a portion of inflation, especially those in retirement who are living off of their savings primarily. While this does involve spending down part of their principal when we look at it in inflation adjusted terms, this strategy may be seen as superior to the higher risks involved in seeking higher returns, and is often a sensible approach actually.
Each year that goes by, unless we are in a depressed economy, the value of currency goes down each year, by the rate of inflation. People often worry about being able to keep up, especially during periods of high inflation, and we have seen plenty of this over the years.
If inflation truly gets out of hand, this can even bring down the economy, which is set up to handle a certain amount, but only a certain amount. Hyperinflation if very dangerous, and we’ve seen this in countries with less well managed economies, and among the effects are one’s life savings being reduced to rubble.
Bullion, especially gold bullion, is widely viewed as a hedge against high inflation. While the correlation here is widely overestimated, one does exist, where in certain situations at least the price of gold will move up with inflation.
On the other hand, bullion can also do quite well in periods of lower inflation, and the market influencers on bullion pricing are simply far too dynamic to have this single influencer make this a sure bet or even perhaps a good one at any given time.
We cannot therefore say that due to the fact that this isn’t so predictable, one should not use bullion to hedge against inflation. One can do so quite well, provided one takes the other factors into account that may be driving the price of bullion.
This can be done quite well through just paying attention to how both inflation and bullion are moving. During the high inflation of the 1970’s for instance, gold did very well, during a bear market in stocks, but there was much more going on with the gold market at this time than just higher inflation, as there always is.
If one is concerned about rising inflation, and the price of bullion is increasing, then this may serve as a good hedge against inflation, against this current inflationary period that is. Should the price of bullion turn the other way though, this can easily result in simply compounding one’s losses, losing to both inflation and losing on the bullion investments.
It is never a good approach to just make blanket assumptions such as gold being a good hedge against inflation, and then buying some for this reason, with no regard to whether high inflation is expected, or whether the bullion investment will help against it or perhaps even make things worse.
With that said, bullion does behave differently than other investments by a significant degree, and investing in it can provide various protections in cases where there may not appear to be a good place to keep your money, provided that the goals here are understood and one conducts one’s investments according to what may be expected and not merely what is hoped.
Bullion Benefits as Primary Investments
While many people think of stocks as the number one way to invest for growth, we may benefit by considering bullion for growth as well. While stocks easily have outperformed bullion over the very long term, this does not mean this is always the case.
There have been significant periods of time where gold has widely outperformed stocks, especially when stocks are mired in a long bear market and bullion may enjoy a long bull market.
We should always be approaching our investment decisions by considering where our money is best placed, taking into account risk and return. Both stocks and bullion can be pretty risky, and both can produce very nice returns over certain periods, and we should not be assuming that if one is better than another over a century than one is always better or better now.
Few people consider bullion as a primary investment and this is almost always used as a diversification or hedge play, meaning that most of your eggs remain in one basket, the stock market primarily, but some eggs are devoted to bullion.
There are periods where it would clearly be unwise to have any of your eggs in the stock market, unless you are shorting that is, and investors don’t really short, even though it’s as easy or easier to make money from shorting than it is by buying stocks. Shorting certainly isn’t a long-term strategy though to be fair, but should this not fit one’s strategy, then there’s always the option of just being out of a market that is performing poorly., and have your money in something else where it would be better placed at the time.
One can do that with bullion as well, be in it when the going is good and be out when the going is not so good, and in spite of the misgivings that a lot of people have that you cannot successfully time markets, this is not difficult at all to do in a broad sense at least. Financial advisors, who want to keep your money under their management, will tell you to leave all this alone, but they aren’t exactly unbiased, or very knowledgeable either for that matter.
The main benefit, by far, with investing in bullion is that it often provides long only investors a place to go when the stock market is not performing well. At the current time, we are in the midst of a bull market, with the stock market continuing to climb, but there are times where the opposite happens, and bullion can serve as a much better place to keep your money.
Timing markets is never about being right all the time, it’s just about being right more often than wrong, and when you see bear markets such as in 2000 or 2007 start to hit, it really doesn’t take much skill at all to figure out that we’re going in the wrong direction if you are long.
The same is true of bullion markets, and if one sees the stock market going down and bullion markets going up, what to do should not be a difficult decision really. Investors who pay attention to such things and seek to take advantage of moving the bulk of their assets away from investments that have a poor horizon and toward those which have a better one tend to be rewarded.
Bullion, given it’s potential for growth, can indeed serve as a good primary investment, even having most of your eggs in these baskets so to speak, but all of this involves investing more wisely and a whole lot less blindly than most people prefer to.
Monica uses a balanced approach to investment analysis, ensuring that we looking at the right things and not confined to a single and limiting theory which can lead us astray.