The 6 Myths Of Gold Explained

Here is how we respond to the myths of gold as propagated by some father-in-laws, some financial advisers, and all Paul Krugmans.

Myth 1: Gold “Is A Barbaric Relic”
In fact, John Maynard Keynes never said gold was a “barbaric relic”. Actually, Keynes said that the gold standard monetary system was a barbaric relic.

Myth 2: Gold “Is A Volatile Rollercoaster”
Gold has almost the same volatility as leading equity benchmarks (such as the FTSE All Share and S&P 500) and is much less volatile than most equity indices and far less volatile than individual equities.

Importantly, an allocation to gold in a portfolio has been clearly shown to increase returns and reduce volatility in the entire portfolio. All markets are volatile today, including foreign exchange markets, given the floods of electronic currency sloshing around the global financial system.

Myth 3: Gold Has No Value or No Intrinsic Value
Gold has value today and has retained value throughout history. This value derives from it being extremely rare and finite in nature - unlike paper and electronic money and due to constant universal demand. Gold has an intrinsic value in and of itself, in the same way that oil or water have an intrinsic value.

Myth 4: Gold Has No Utility
Gold has a utility and is a very useful metal as it is used in electronics, technology, dentistry, medicine, industry, jewellery including wedding rings, as medals and trophies denoting the pinnacle of achievement. Gold’s most important use is as a foreign exchange reserve, a store of wealth and as financial insurance.

Recent academic findings and the historical record confirms that gold is a safe haven asset and an important diversification as a means of preserving wealth.

People in the UK, the U.S., Ireland and Cyprus and throughout the world who have owned gold since the global financial crisis began in 2007 will confirm gold’s utility as it has increased in value significantly in that time.

Myth 5: Gold Is A “Bad and Dangerous Investment”
Gold is a “bad and dangerous investment” and “proof” of this is that it fell from $850/oz on January 21st, 1980 to $300/oz in June 1982 or $250/oz in 1999.

Using the very short lived spike to $850/oz on January 21st, 1980 as a pricing benchmark for performance is unfair and selective. By doing so one ignores that fact that the majority of people did not buy gold on January 21st, 1980 or even in January 1980. Rather, the majority bought gold in the hundreds of other months prior to January 1980, and since.

Always focusing on gold’s poor performance from and after January 1980 is selective data mining.

In terms of performance and returns, gold has outperformed most equity indices since it became traded in 1971. Studies that purport to show gold is a poorly performing asset over the long term (since 1900 or 1950 for example) are bogus. Gold was not freely traded like stocks until 1971 as gold was money and backed paper currencies at a fixed price throughout much of history until Nixon went of the Gold Standard in 1971.

Solely focusing on possible returns, ignores that fact that gold is not really an investment at all – rather it is financial insurance and a safe haven.

Myth 6: Gold Is A Bubble or Was A Bubble:
Gold may have been a bubble when it soared to over $1,900/oz in August 2011. Opinions differ.

At the very least gold had become very overvalued in the short term. After falling 35% since then to nearly $1,200 per ounce, it is hard to still maintain that gold is a bubble. Especially as the average global cost to mine one ounce of gold has now risen to $1,200/oz.

Today, there are strong grounds to be concerned that stock markets and bond markets are bubbles. However, no one can predict the future price movement of any asset class – hence the importance of diversification.

Conclusion
As with everything in life, it is best to do your own research prior to forming a judgement and acting.

We advise all our cleints to go online and read about and watch videos about the pros and cons of gold. Buy a book or two about gold or start by downloading our ‘Guide To Investing in Gold’. Those who do so will realise that while gold is not riskless or risk free, many of the myths attached to gold are easily debunked.

Knowledge is power and educating yourself about gold is important if you wish to understand gold’s importance as financial insurance and as a safe haven asset in an uncertain world.