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Bloomberg's Gold Investment Advice Is Spot On

This week we discuss the massive surge of interest in gold as an investment. Right now, everyone from central banks to college students are buying gold – in record-breaking quantities…

From Peter Reagan at Birch Gold Group

This week, Your News to Know rounds up the latest top stories involving gold and the overall economy. Stories include: Is gold finally breaching into the mainstream? then gold investment trends and records and gold as a “proof of time.”

Bloomberg is now offering gold investment advice

Do Bloomberg's readers really need a primer on gold investment? Aren't they all experienced economists and investors who know every asset inside and out? Judging by Bloomberg's latest step-by-step gold investment guide, we'd say not. It almost seems as if a new group of investors might be getting interested in gold.

John Stepek brings us a U.K. perspective on portfolio allocation, though he is spurred by gold's climb to $1,930. Or is he? As he tells us, gold has been trading at £1,580 (which happens to be the all-time high in British pounds sterling). We've previously discussed how gold’s price Japanese yen is performing far better than in dollars.

It should come as no surprise that it's outperforming in pound sterling, too.

Stepek covers things that our readers will be well-versed in, but there are a few points worth dissecting. Firstly, Stepek argues in favor of a four-fold portfolio allocation:

I flagged up gold as being a separate asset that should be considered for a place in your portfolio.

Stepek mentions that, prior to the Great Financial Crisis, gold was considered a paranoid investment. That is to say, investing in gold was the equivalent of building a doomsday bunker in your back yard. Probably because gold is “the sort of asset that does well when everything else is doing badly.”

Regardless whether gold was ever categorized alongside doomsday prepping and bug-out bags, gold's reputation is improving. (Obviously! Otherwise this article would appear in magazines like Survivor’s Edge or Offgrid.)

Why gold? Stepek says:

But what’s the gold for? You can think of gold in various ways, but the simplest way is to think of it as portfolio insurance. It diversifies your portfolio in a different way... It’s the sort of asset that does well when everything else is doing badly.

The old Wall Street saying (apparently) is ‘hold gold and hope it doesn’t go up,’ and that really sums up the rationale for owning the stuff.

Those who were familiar with gold probably didn't need convincing.

Still, I've covered skyrocketing gold sales in the U.S. over the past few years have become “the new normal.” Now, apparently, Gen Z has discovered gold, too. Why? We’re told:

the last few years have shaken their faith in the U.S. dollar, stocks and cryptocurrency. But they trust gold.

The 20-year-old gold buyer described by NPR “says her grandfather, a schoolteacher, invested in stocks and gold and was able to retire very comfortably.”

I have to hand it to her – at least she’s starting early!

And she’s certainly not alone, as the latest sales figures show us…

The 2022 numbers are in, and gold demand broke records (again)

The World Gold Council's full report on last year's gold demand is fulfilling, in a sense. When I learned that central bank gold demand matched a record from 1967, I obviously wondered what the annual figures will look like.

Knowing in advance gold demand would be strong, I was still surprised…

During 2022, central banks bought 1,136 tons of gold (net). That’s:

  • The highest annual figure since 1967
  • The second-highest level of annual central bank buying since 1950
  • The thirteenth consecutive year of central banks being net buyers, rather than sellers, of gold

In the wake of the Great Financial Crisis, central banks became net gold buyers starting in 2010. Personally, I can’t quite envision a scenario where they’d reverse course. A catastrophic liquidity squeeze might do the trick – but even then I’m not so sure they’d be eager to reduce their gold reserves.

Demand for physical gold coins and bars rose by only 2% year-over-year to 1,218 tons. That’s also rather surprising – until we reflect that 2021 was a huge year for physical gold purchases (1,191 tons, or 32% above 2020’s sales).

Two thoughts occurred to me:

  1. I’m astonished that demand from private investors actually surpassed central banks!
  2. Based on the level of business we’ve been doing, I would’ve guessed gold demand was up significantly over last year. I dug a little deeper and learned that combined U.S. and European purchasing of gold bars and coins hit an all-time record of 427 tons. That makes a lot more sense!

Now, the 2022 gold demand report wasn’t all good news. Demand from two sectors declined:

  • Jewelry: down about 2%
  • Technology: down 7%

Ask yourself: Is this surprising? We'd love for people keep propping up the gold market with jewelry purchases, but they're probably too busy trying to scrape together enough money for a dozen eggs. (The decline from tech sector manufacturing is to be expected, considering everything else that's going on in the economy.)

We frequently cover top gold buyers whose economies are in peril, including Russia and Turkey. And I’ve noticed Egypt recently becoming a big gold buyer, but I didn't have sufficient details to report on it. Apparently, having a central bank continuously devaluing your currency isn’t just a U.S. phenomenon. Consider, Turkey’s annual rate of inflation is over 50% and the Egyptian pound “has lost over half its value since the first devaluation in March” 2022.

Regardless of religion or nationality, it seems like everyone is desperate for a safe-haven store of value that’s resistant to central bank meddling. I don’t know whether this is a heartwarming story of our shared humanity, or a scathing indictment of Modern Monetary Theory and its deluded practitioners…

Let me ask a different question: why gold? Why are Americans, Europeans and Middle Easterners all choosing the same asset to shelter their hard-earned savings?

Here’s one very plausible answer…

Proof of time (a different perspective on gold investment)

It's not that often I stumble across a discussion of gold’s value that truly surprises me. Sovereign Man's Simon Black has gone ahead and done it. His discussion, gold as a "proof of time," is a totally different angle that I found intriguing.

Black covers some things we all know: time and money might as well be synonyms. Every object represents the time and materials required to create it.

Well, manufactured objects at least. We could discuss such “priceless” things such as rocks and foliage. Or we could follow Black's own example of the iPhone. Cheap for Apple to produce. Equipped with a limited 2-year warranty, and incorporating countless hours of labor! And not just on the assembly line. Invention, patents, designs, logistics, brokering deals to get a factory open in China... All this before we even get to the assembly line worker’s time. The result of all this time? A representative and proportional price.

How do those workers, those designers and lawyers and logistics experts get paid? They exchange their time for money. Nearly every one of us makes this same exchange, at our jobs or running our business, every day.

Now, a gold coin or a gold bullion bar is something like an iPhone – it’s priced based on the amount of time that’s invested in its production.

Unlike an iPhone, a gold coin doesn't corrode. It has no engineered obsolescence. (And it won’t break if you drop it in the toilet.) Obviously, gold in any form is a lot more durable and persistent than a more technologically-dense item.

Black’s big idea, as I understand it, is this:

Gold’s price, combined with its ageless durability, is a purchase you make to ensure your time isn’t wasted.

Black calls it “proof of time” as opposed to “proof of work” (like back in high school, when my algebra teacher insisted show your work to prove we didn’t just copy our answers).

One of the really memorable sections of this story:

Time is the ultimate scarce resource. No one, no matter how rich or powerful, can create any more of it. And once it is used, it is gone forever.

Labor is one of the ways that we use time. And gold is a rare asset that transmits both time and labor… forever.

Black's in-depth look takes us all the way to Micronesia’s famous island of Yap, where the indigenous peoples famously used impractically-large stone discs as money. Despite their lack of economic theories, they have what Black calls an “advanced financial system” based on proof of work.

Essentially, those massive Yapese stone coins store the number of hours required to produce them. It's really not too dissimilar from our economic system.

What is a dollar bill, after all?

Someone, somewhere, worked for it. They exchanged their time for money.

The question Black challenges us to answer is this: Once we’ve made this exchange, are dollars the best way to store what we’ve earned?

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