In an interview with the World Gold Council for the latest edition of Gold Investor, former Bank of England head Lord Mervyn King made the case that it’s sensible for central banks to buy and hold gold.
Interestingly, the reasons he offered are good reasons for individual investors to buy gold as well.
King addressed the fact that many Asian and South American nations are increasing their gold reserves. He said they don’t want to rely completely on US bonds, and pointed out that while most people take it as given the US would never default, debt comes with inherent risk. Just ask the people who invested in Puerto Rican bonds.
I can understand why they feel that some proportion of their portfolio needs to be in gold. Over the last decade or so, the claims by some emerging market countries on the US have grown. Who knows what the future holds, but China and other countries do not want to be in a situation where all their international assets are in effect dependent on the US. Of course the US would not want to renege on its debts, but if some awful conflagration occurred, then all China’s assets in the US might be annulled. So there are plenty of big concerns that make it extremely reasonable to have assets in your portfolio that are not dependent on the goodwill of other countries.”
This line of thinking makes perfect sense for the individual investor as well. As SchiffGold Precious Metals Specialist Dickson Buchanan puts it, gold carries with it no counterparty risk:
Therefore, the true bearer of the title ‘risk free asset’ should be gold – not T-bills or whatever other names government paper has. This is because gold is liquid under all market conditions.”
Silver is another excellent way to minimize your dependence on the goodwill of others.
World governments have clearly not found the solution to maintaining price stability with managed paper currencies. Just look at Venezuela to see how quickly central planning can go awry. King said central banks, especially in emerging markets, should hold gold as a hedge against rising inflation and the threat of hyperinflation:
I can understand why holding gold would seem to be a sensible part of a national portfolio. Because there is clearly a need to take some precautions against an unknowable future.”
Again, this wisdom applies to individuals as well as central banks – probably more so. The unknowable future poses a bigger threat to the average Joe than central banks. You and I can’t print money to dig ourselves out of a crisis.
In fact, it is central banks that are creating much of the instability in the world, with round after round of quantitative easing and negative interest rates. Interestingly, even King, a former central banker, seems to recognize the limits of monetary policy.
Unless you take steps to deal with that underlying disequilibrium, all monetary policy does is to essentially buy a bit more time in the hope that policymakers will do the right thing. But we’ve bought eight years now and they still haven’t done what’s right.”
It seems a pretty good bet they won’t ever do what’s right.
Courtesy: Samuel Bryan
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