How to cushion the coming financial fall-out
Shares, property and crypto are falling & inflation rising. Stock markets have been dropping by 7-8 per cent this year, whereas, prices of gold have been up by 7-8 per cent. What do investors do? Is it time to invest in gold?
FOMO is over. Now the world is on the road to high inflation and the highly undesirable consequence of erosion of investments – bringing that ancient symbol of wealth, gold, more into play.
The Fear Of Missing Out (FOMO) has been a key factor in the unrealistically high peaks of the property market (in New Zealand and the rest of the world) and stock markets around the globe.
But the much-heralded “correction” is now here and, according to director of New Zealand Gold Merchants, Tony Coleman, it is not a panicked correction but an orderly one. That means investors have a chance to protect their investments.
“We have seen large amounts of money coming out of stock markets and term deposits and into gold and silver,” he says. “It’s all about protection – people are protecting themselves from overheated markets and from inflationary pressures and weakening currencies.
“This isn’t a panic or anything like that; it’s orderly. It’s a correction, well overdue, but we are not seeing anything like the panic that occurred in 2011 and 2020. What’s happened is the FOMO and the “buy now” syndrome have dissipated somewhat. It’s been tempered.”
Even the major crypto-currencies have suffered, losing about a trillion dollars in the last four months, he says: “This is only a theory but I think what’s happened is that crypto’s boom was started by traders investing there instead of gold. Now that the markets are down and they need liquidity, they need to get out of crypto.
“Institutional buying of crypto has been massive, so I think what’s happened is that crypto-currencies have been aligned with the very markets they were trying not to align with.”
Gold – and to a lesser extent silver – are still the best ways to protect invested money, Coleman says, with centuries of proof and analysing prices on gold, that the precious metal is a hedge against inflation.
“We are not saying that gold and silver are the portfolio,” he says, “but they are a component of a portfolio – the protection component. If the other components of the portfolio are not performing, it has been proved over and over again that gold will be – protecting the investor against losses.
“Gold is working absolutely perfectly at the moment.”
But what is happening with the gold nz price?
The gold price today is rising. Prices on gold, he says, have been strengthening so far this year, up by 7-8 per cent. Stock markets, meanwhile, have been dropping by 7-8 per cent: “I have investments in gold, silver and property. I don’t expect all of them to be performing at the same time; I expect at least one to do well at a certain time. My Bitcoin lost 11 per cent last week.”
New Zealand’s inflation, already 4.9 per cent, is projected to reach 6 per cent soon and Coleman thinks it will settle somewhere between 5-8 per cent. That means, he says, that any investment has to clear 5-8 per cent profit before any financial ground is made.
The picture is worsened by the fact much of New Zealand’s inflation will be imported – and because of the inability to try to make some hay out of currency exchange: “Last June, the banks very quietly all pulled out of foreign currency.
“All the Thomas Cooks and businesses like them have gone because of Covid-19; no one is travelling. So the banks aren’t doing it either. You can still have a digital account for currency trading, of course, but foreign cash is now illiquid in New Zealand.”
Rising costs from disrupted supply chains will likely be passed on to consumers everywhere, like the cost of shipping and the effects of rising demand.
“Two years ago, we imported some plant we needed from China. It cost $2500 to get it here. We are importing the exact same piece of plant again this year – but now it costs $15,000.
“I have been saying since early 2021 – longer – that inflation is primed to soar. Anyone under 40 years old has had a working life of falling interest rates and rising asset prices – but I warned then that things would change. Now they are.
“Inflation is like a parasite eating your cash – it eats away a little at a time, leaving you a little less wealthy each year. Even when you earn interest, it erodes the principal.”
Coleman says gold is the appropriate response to falling returns and inflationary pressures. Although many believe gold carries risk (which it does), he says it is demonstrably proven that buying gold is a very good inflationary hedge over time.
“Around the world, we’ve seen governments borrowing or creating money to live through the pandemic – which has distorted everything and that kind of increase in the money supply means the US dollar has been hyper-inflated.
“So when I talk about gold, I talk about risk – and the appetite for risk has diminished now. Gold has less risk and the prices on gold are on an upward trajectory.”