Patience is bitter, but its fruit is sweet. (Jean-Jacques Rousseau)

In these volatile times it is a good thing to remember this saying which might in particular apply to the subject of gold bullion and mining funds. Should, or should one not be presently invested in this arena? Certainly the financial press would suggest that it is the wise thing to do. They tell us that gold is an insurance against geopolitical unrest, financial distress, war between nations and infrastructure collapse. It also performs well both in times of inflation and deflation. Today, when negative interest rates prevail, gold becomes a high yield asset since zero yield (gold) is higher than negative yield (government bonds).

As a private individual, if one makes the decision to go down this road, then one also must make the decision whether to hold the actual bullion or to invest in the gold mining funds. I know it is irrational, but I feel uneasy about holding gold from the security point of view, even if using outside secure storage. So for me I have gone down the route of investing into mining funds, which I can buy and hold in my portfolio in the same way as any other fund of my choice. By doing this I have to accept that there is not an exact correlation between the movements of the bullion price to the mining fund prices, but they do trend in the same direction.

Looking at the graph of the price of gold over the last hundred or so years it would seem that in times of financial stress the gold price will rise and in the good times it falls in value. There are three distinct peaks:

  • The first is in the 1930’s. In 1900 the US adopted the gold standard, and the official US gold price was fixed at $20.67 (not much higher than it was at end of the 1700s). In 1934 the US Government devalued the dollar (in terms of gold) raising the official price of gold to over $35 per oz. It’s doesn’t look significant on the graph, because it is dwarfed by subsequent rises, but that was equivalent to a 70% increase.
  • Then in the 1980 it went up again, fuelled by concerns over the Soviet invasion of Afghanistan and the Islamic Revolution in Iran. It went up to $850 per oz., before falling below $260 in 1999.
  • Finally it peaked again in 2011, at just under $1900 per oz.

Gold 100 year graphSince the 1970s, after President Richard Nixon ended US dollar convertibility to gold, the price of gold has fluctuated more widely –  it also appears to rise much more rapidly than it falls. Approximately ten years on the rise and twenty to thirty years on the fall. Surprisingly it would also appear to ignore periods of conflict and has only moved for economic reasons.

Today one could certainly be forgiven for feeling that the financial situation in all the major world economies is far from secure, so perhaps now is the time to have some of your savings invested in this asset.

During most of history, a nation`s gold reserves were considered its key financial asset, intended as a store of value and as a guarantee to pay depositors or secure currency. It is calculated that all the gold that has ever been mined would approximate to 180,000 tonnes and at today`s value that would be in excess of $8 trillion. Apparently most of this gold is still in existence. A United States Geological survey allocated this gold as follows:

  • Jewellery 49%
  • Investment bars and coins 19%
  • Central Banks 17%
  • Industrial 12%
  • Lost 3%.

The top ten central banks control some 12% of all the gold ever mined with the United States being the largest holder with 8100 tonnes, Germany 3384 tonnes, I.M.F. 2800 tonnes, Italy 2450 tonnes, France2400 tonnes, China 1800 tonnes, Russia1400 tonnes, Switzerland 1040 tonnes, Japan 760 tonnes and Holland 600 tonnes. The United Kingdom is now eighteenth on the list with 300 tonnes. I knew about the United States fondness for holding gold as the dollar was until 1971 linked to the gold standard. I was surprised however at the amount held by Germany, Italy, France and Holland. For these countries these holdings represent over 60% of their Forex reserves whereas the U.K.`s holding only represents 8%. These countries are obviously putting more value in the future necessity for holding gold bullion. What do they know that we do not?

Perhaps these governments in the European Union are not confident of a world economic recovery.  Or maybe the recent hike upwards in price simply reflects the buying power of the millions of the “new middle classes” in India, China and the developing countries who want to own and display their new-found wealth in the form of jewellery, coins and gold bars. Gold gives people peace of mind and has for thousands of years been used as a medium of exchange. Possibly now for a number of reasons demand for this precious metal is going to outrun supply and the price may continue to rise.

I am aware that this is a simplistic approach to a complicated subject, but I do feel that now is the time to hold some gold bullion or in my case gold mining funds, then to have the patience to let this situation play out and see if it does bear fruit over the next few years.