Gold E1000: Crisis Insurance or Bubble?

By: Adrian Ash | Fri, May 14, 2010
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Rising insurance premiums don't negate the need to insure...

IS GOLD in a bubble at €1000 an ounce? Let's hope so. Because if not, it would mean investors are right to keep bidding crisis insurance higher.

Buying gold is like buying an option that gives you security, liquidity and diversification when you need it most - which is when other stores of wealth fail.

Yes, the cost of insurance - the premium on gold's option - has risen since before the current crisis began. But that doesn't negate the need to insure your savings.

"First, security - the absence of any credit risk is an intrinsic quality of gold," as Hervé Hannoun, then of the Banque de France, now of the BIS, said at the FT's Gold Conference in mid-2000.

"Second, liquidity - in situations of political turmoil or high global inflation, gold's liquidity is unchallenged. [And third,] diversification - gold has shown a very low and even a negative correlation with the Dollar and US Treasuries...it enables you to improve your risk/return profile."

Now, glancing back across the 10 years (and 590 tonnes of French central-bank gold sales) since Hannoun spoke, that third factor - diversification - might seem the most valuable.

After all, gold has risen 350% vs. the Dollar since June 2000, while the S&P has lost almost one fifth. US Treasury bonds have paid less than half the real yield of the preceding two decades (1.8% vs. 4.4% on 10-year Treasuries).

But it's the first two attributes - security and liquidity - that make gold's long-term diversification possible. In periods of investment stress, its security and liquidity are unparalleled. They add up to outperformance when other, more normally productive stores of wealth either slump (like today) or deliver grinding losses (as they have over the last decade).

 


 

Adrian Ash

Author: Adrian Ash

Adrian Ash
BullionVault.com

Formerly City correspondent for The Daily Reckoning in London and head of editorial at the UK's leading financial advisory for private investors, Adrian Ash is the head of research at BullionVault, where you can buy gold today vaulted in Zurich on $3 spreads and 0.8% dealing fees.

About BullionVault

BullionVault is the secure, low-cost gold and silver exchange for private investors. It enables you to buy and sell professional-grade bullion at live prices online, storing your physical property in market-accredited, non-bank vaults in London, New York and Zurich.

By February 2011, less than six years after launch, more than 21,000 people from 97 countries used BullionVault, owning well over 21 tonnes of physical gold (US$940m) and 140 tonnes of physical silver (US$129m) as their outright property. There is no minimum investment and users can deal as little as one gram at a time. Each user's unique holding is proven, each day, by the public reconciliation of client property with formal bullion-market bar lists.

BullionVault is a full member of professional trade body the London Bullion Market Association (LBMA). Its innovative online platform was recognized in 2009 by the UK's prestigious Queen's Awards for Enterprise. In June 2010, the gold industry's key market-development body the World Gold Council (www.gold.org) joined with the internet and technology fund Augmentum Capital, which is backed by the London listed Rothschild Investment Trust (RIT Capital Partners), in making an $18.8 million (£12.5m) investment in the business.

For more information, visit http://www.bullionvault.com

© BullionVault 2006-2014

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events - and must be verified elsewhere - should you choose to act on it.

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