Gold a better hedge than Bitcoin
In volatile & risky times, some investments offer better safety.
Tony Coleman, managing director and founder of New Zealand Gold Merchants Ltd, offers his opinion on the best way to balance an investment portfolio.
One of the most important words in anyone’s financial vocabulary is: diversification, otherwise known as protecting oneself from the cold winds that can blow through the financial markets.
New Zealand, at the moment, is heavily exposed to what seem to be two burst-able bubbles – the share market and the property market, both of which most experts agree are massively overpriced, even though recent government measures to cool the property market have been applied.
So diversification is a must for any balanced portfolio and investors shouldn’t opt for a third bubble. Logically, diversification involves investments which move in a different direction if other investments are trending down.
That’s where gold – and potentially other precious metals like platinum, palladium, silver and copper – come in, though I see the white metals as carrying more risk and volatility than gold.
More of that later – for now, let’s look at the logic of diversification and the best way to manage it.
Look at the world right now. Covid-19 is re-surging in Asia and many other places and most observers say the world’s share prices and property prices are artificially high. So, if you have a need for diversification – and anyone with money invested in property and equities does – look for these two elements:
- A deep market (meaning a lot of volume being traded) and
- Liquidity – meaning it is always easy to find a buyer, easy to get into the market and easy to get out
Gold is easily the best choice in regards to those two factors. There’s been a lot of fuss in recent times about Bitcoin. People have called it “the new gold” and, sure, it has a role to play. But it fails the above test because it simply isn’t deep enough and liquid enough.
I know someone whose Bitcoin investment soared up to $20,000. But he sold it for only $3000. Why? Because it is such a small market, he couldn’t find a buyer. They were all sitting on the outside, waiting for the price to drop – and that’s exactly what happened. Bitcoin is also ripe for being hit by regulators – it’s unregulated at the moment and it’s a bit of a financial Wild West – there are no rules.
“Synthetic” investments like futures contracts (where you own a piece of paper but not the underlying asset) means that you are exposed to price fluctuations without actually owning anything physical – not, I say, very good insurance.
The rule of thumb is that a conservative investment is that 20 per cent of total net worth (outside your family home) should be in something like precious metals. Even the massive hedge funds hold gold, because they know it will help get them out of bad positions.
Look at the last time the world experienced a big backwards step – the global financial crisis of 2008. The gold and silver price rose steadily from 2000 and, when the stock market crashed (as did the property markets round the world), even gold fell by about 30 per cent in US dollar terms, (though the collapse of the New Zealand dollar kept gold stable in Kiwi terms).
Then gold rose and rose again to US$1921 in 2011 – a 270 per cent increase from its 2008 low.
In New Zealand dollar terms, gold went from $837 per oz to $2310, an increase of 275 per cent with no initial dip.
This is how gold is meant to perform, protect the downside risk in times of trouble and behave predictably under normal market conditions.Gold and silver helped to counteract losses from the huge stock market and property bubbles. Precious metals also come into their own when governments, as many are now doing (including New Zealand), print more and more money to manage their way through Covid-19 and other pressures.
Gold and silver are real money, real assets – not some contrived financial manoeuvre – and they come into their own when the going gets tough.
We never say people should put all their money into gold – but it should be part of your investment portfolio. Financial history proves that gold protects your wealth from big downturns and we consider it the ultimate insurance in a financial portfolio.
That said, what about other precious metals like platinum, palladium and copper? Well, both platinum and palladium – the latter used in catalytic converters – have soared recently. However, in my view, they are more volatile than gold or silver.
People really need to do their homework and understand the market. For example, palladium attracts GST – so it costs an extra 15 per cent, because it is used in jewellery as well. Platinum doesn’t – and neither does gold and silver.
That can catch people out, as can the spread between the bid and ask (the bid is the maximum price a buyer will pay; the ask is the minimum the buyer will pay for the same asset). For palladium, the difference between bid and ask is $150. The difference between bid and ask on gold is 60 cents; $5 for platinum.
Those are the kind of things people need to know and which will affect their choice of a diversification investment designed to protect them.
For more information and to see graphs tracking the rise in value of gold, silver, platinum and palladium over periods ranging from one week to five years, click here.
*NZ Gold Merchants began in 1975 and brothers Tony and Richard Coleman began buying, refining and selling gold and trading in precious metals in 2006. They were the first New Zealand company to produce local silver bars and the first to offer gold chain manufactured with local gold.
Read the original article; https://www.nzherald.co.nz/brand-insight/gold-a-better-hedge-than-bitcoin/P5XYSKQP6NHSB5GEQB6AF2XV7Y/
Old jewellery and gold scrap produce surprising amounts of pure gold.
The chess set looked like it was made of lead. It was heavy, with a dull sheen to it – but it was actually 24-carat gold, worth a fortune.
“It was smuggled out of South Africa in the days when it was illegal to take wealth out of the country,” says John Hunter, business relationship manager at New Zealand Gold Merchants Ltd – the country’s leading bullion trading company and precious metals (gold and silver) refinery.
“He’d been very clever with it; he’d moulded and cast the set and painted it a lead colour with lead-based paint. Then he turned up in our office carrying it – his family fortune.”
That is an example – admittedly an unusual one – of private sellers who arrive at NZ Gold Merchants with gold to sell. Yet direct private transactions like that form only a small percentage of the gold the company refines and manufactures into beautiful, fine gold (999.9 parts per thousand)
Instead, NZ Gold Merchants pursue something called “urban mining” – the art of recycling old gold and gold scrap from manufacturing jewellers. Internationally, urban mining makes up about 30 per cent of the available above ground gold in the world at any one time (as measured by the World Gold Council).
You get a better idea of the importance of this source of gold when Hunter says that China, the world’s leading producer of gold, releases about 400 tonnes a year. “It’s not that much in the scheme of things,” says Hunter. “Imagine a 20-litre container; 400 tonnes a year of gold would fill only 1000 20-litre containers.
“Of course, it weighs a lot more – full of water, the 20-litre container weighs about 20kg. Full of gold, the same container would weigh 400kg.”
New Zealand, with gold mined in Coromandel, West Coast and Central Otago, is among the top 30 gold producers in the world – but Hunter says NZ Gold Merchants’ urban mining makes up more of their business than the 30 per cent international average.
It is an interesting process – and in comparative infancy until 2008’s global financial crisis saw Kiwis (and people all over the world) selling off gold and jewellery to raise much-needed cash. In 2009, there was a veritable flood of gold.
It created a new and ongoing revenue stream, not just for refiners like NZ Gold Merchants but also jewellers, antique dealers and second-hand shops. It was established in two ways – those businesses sold on whole pieces of old, unwanted or outdated jewellery to Hunter’s company; they also bought what is known as lemel from manufacturing jewellers.
Lemel is the small shavings of precious metals that accrue through the manufacture of jewellery. These shavings are collected and purchased by NZ Gold Merchants.
Hunter says: “That’s where our cutting-edge technology comes into play. The lemel and the old jewellery go to our refinery in Onehunga and we melt them down into a bar.
“Then the bar is analysed using X-ray Fluorescence (XRF) which qualitatively and quantitatively analyses the sample in moments. It highlights the gold, silver, platinum or palladium present, as well as metals other metals like nickel, copper, iron, zinc and cadmium.
“So we know the level of gold in that bar and then we use a series of acids – including hydrochloric and nitric acid – and other processes to refine the gold to a pure form.”
The process of gold purification is a highly skilled operation which is often more art form than process; technological improvements refining processes over the years have led to extremely high quality gold emanating from New Zealand refineries.
That enables NZ Gold Merchants to manufacture bars and ingots from locally refined gold under the NZ PURE™ brand, to complement the range of international brands such as ABC, PAMP and Royal Canadian Mint that the company typically holds.
Why buying gold now might be the smartest financial decision.
New Zealand has generations of people who believe that property prices increase constantly and those who have borrowed too much could – in a worst-case scenario – be caught in a horror scenario of negative equity and ongoing debt.
That’s the view of Tony Coleman, managing director and founder of NZ Gold Merchants, a bullion trading company specialising in gold and silver, markets which traditionally come into their own in a post-Covid-19 downturn widely predicted by many experts.
“I am very worried about all those people from generations who have jumped into the housing market, some of them at any cost,” he says. “The government and the Reserve Bank tell us they can fix the runaway housing prices issue – but they can’t.
“The only way they can fix it is by raising interest rates – and that will badly affect our economy as it will make our dollar so expensive that our exporters won’t be able to make a decent income.”
Coleman, a close follower of New Zealand’s economic trends, believes our falsely inflated house prices will have a hard landing eventually – though he predicts a “squeeze, not a whack”.
“I think some people have gone ‘all in’ to own a house and will be trapped; they will be unable to sell, their standard of living will drop tremendously as their obligation to pay the bank back will become a priority.
“Some could lose the house and negative equity [where more is owed than the house value] could apply – so they will still be paying off a debt because of the type of contracts we use here in New Zealand. It will see, I believe, a generation who will be caught out and need to be bailed out by their parents.”
While gold prices often go up in tough times as investors look for a safe haven if investments like shares and property are in a downward spiral, Coleman says shifting money into precious metals is not as speculative a move as might be thought.
“The value of gold and silver has proved to be a reliable investment, with double-digit increases in value being the norm in the last 20 years,” he says, “putting gold investors in an advantageous position — because the central banks’ monetary policy manoeuvrings are to the detriment of savers.”
The banks’ use of low interest rates to “smooth out” the boom/bust syndrome of the business cycle has fuelled the investment in housing, pushing up prices and increasing the risk, he says. The government’s recent guarantee to the banks on new mortgage lending, and allowing big banks to offer a mortgage holiday to those most affected by Covid-19, has eased some of the burden.
“But I do not believe this game of musical chairs can continue for much longer,” says Coleman. “When the music stops, many of us will be left standing without a chair to sit on.”
With the likelihood of risk increasing as the pandemic continues to affect the world, and global debt mounts, now is an optimal time to move money into safe haven assets, such as gold, he says.
As well as being a hedge against inflation, gold is an asset class that has benefited from quantitative easing (governments creating more debt by printing money, as New Zealand has done recently), assets priced in those currencies will increase in value.
The graph below shows how the gold price has risen against the effect of other economic factors.
Coleman predicted at the end of last year that gold would increase by 40-45 per cent this year. He was a little out, he says now, because of New Zealand’s strong export performance in areas like dairy – but says world gold experts are still predicting a gold price increase by the end of the year to US$2300-$2500 from the current price of US$1830 – still a rise of 27 per cent at the bottom end of that range.
“If gold does nothing but cover your cost of inflation, you should hold some,” he says. “Gold is an exceptional store of value, it has no counter party risk, it is extremely liquid and it is a contrarian investment – it goes up when other investments go down and that’s what you want in a portfolio. You want to be rescued by a market that is going up when others are going down.”
He offers the following tips when thinking about buying gold:
- The sooner you own some, the better off financially you will be
- Buy on a dip after a major price rise, such as we see now
- Don’t let FOMO rule your decision-making
- A conservative investment is up to 20 per cent of your wealth excluding your home
- Buy from a professional. The product is guaranteed pure, and is normally cheaper than other platforms, like TradeMe, where the price of gold is often $50-$60 higher because of added fees
- Keep adding gold in any dips
Read the Original Article: https://www.nzherald.co.nz/brand-insight/property-investment-the-hidden-danger/5Z3I445EGYHURICK7Z7QHHCM3Y/