Tuesday, January 27, 2009

Gold Investing In 2009

Been rolling over my sole gold futures position as a bet and a hedge. So far, it allows me to sleep well at night. You may choose to trade stocks now or stay on the sidelines, both have solid arguments for doing so. Do consider that as the yen rate is still below 93, it would be wise to only have 1/3 or less of your cash in shares.

The gold position acts as a good bet and good hedge for me. Its a hedge if inflationary pressures come into play, owing to vast sums of liquidity being injected by the many central banks. Its a bet that the risk aversion may favour holding only real assets, if you come to extreme pessimism, all assets classes will be shunned, including stocks, bonds, even Treasuries, thus leaving gold as the sole carrier of value.

The case for gold is this: The US government (and many other governments actually) is pumping trillions of dollars into bailouts and stimulus plans, a purposefully inflationary policy aimed at reversing current deflationary pressures. If inflation results, or if the dollar weakens as the supply of dollars necessarily increases under the stimulus plans, gold is a likely winner because it hedges against inflation and fiat currencies.

The opposing view: The inflation argument hasn't been seen yet in government data, and once the economy catches gear, the [Federal Reserve] will pull the money back out of the economy, negating any inflationary pressures. That to me is a weak argument because if the economy starts a strong run up, there will be substantial inflationary pressure on that alone, and having dug back from the abyss of financial ruin, it is very unlikely that the governments would suck back the liquidity too quickly.

The better opposing argument would be that the weak economic data in trade and employment may bring about a dis-inflation period rather than a re-inflation era. That is also easily dismissed because if the weak data continue for another 6-12 months, we would be well into a deep recession, which will make stocks and commodities fall even more. Though gold would also weaken, but in that situation I do not see gold prices weakening by that much as jittery conditions would result in fear which favours gold... those jittery conditions would result in more liquidity and bailouts, not less, thus priming the global economy for a reflationary period, not dis-inflation.

Most stocks have fallen by 40% on average from their highs while gold as only eased by 18% from its highs. The supply of gold is being tightened - Africa’s production of gold sank 14% in 2008 which was the lowest levels since 1899. Even U.S. gold production fell 2% last year. Governments are not selling any gold, any smart government would be hoarding or even diversifying some of their currency holdings away from USD and Euro into gold. The financial health of many countries are on the edge, we may see the British pound collapsing further and/or a selldown in Euro and USD as well. In these trying conditions, many smaller governments would want to hold more gold, not less.

We must remember that the USD and Euro are not backed by anything - must revisit my economic thesis on the wonders of linking currency to the gold standard. If one major currency totally collapses, the best way to recover is to announce that the currency would be backed by a certain amount in gold.
In good times, or for most of the last 5 years, central banks worldwide have been net sellers of their gold holdings because they see it being more prudent to hold a wider array of currencies in strong economies. For 2008, as a reflection of the fear within governments, gold selling by central banks dropped by 42%.

Gold is a must for your portfolio. It should equate the amount of fund you are dabbling in stocks. If you are throwing in only 20% of your cash into stocks, you should have a similar sum in gold. Even if you have zero equity exposure, you should still have some gold positions.


p/s photos: Ivy Chen


DiN said...

I was thinking of investing in gold too, but don't know where to start. The only place I know to start investing in gold is Maybank, or buy them from jeweller. Is Maybank's Gold Savings account enough, or do I need to go for the bullion coins?

Remnant 613 said...

The simplest method would be to open a gold saving passbook w/ Maybank or Public bank. Check the spread betw. sell/buy of the two banks. Then decide for self.

If you're serious investor, then consider buying the gold coins and keep it in safe dep. box. This way, you are really holding physical gold, not merely exchanging yr paper ringgit with another paper instrument (gold save passbook).

Why hold physical gold, then?
1. when banks fails, you dont want to be holding any form of passbook, may it be savings, fixed dep. or gold savings. you need to hold the metal.
2. when the whole world currencies is in turmoil and financial system collapses, guess what currencies will hold..? eg. British financial down, pound down but Gold stable and up. Those who bought gold in Britian wins.
Imagine all currencies incl. RM fail, who wins..? Those who bought gold..!


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