Gold Is Insurance: Buy Before You Need It

Gold rallied in the wake of the tragic ISIS terror attack in Paris on Friday.

Multiple media reports framed the rise in the price of gold as “safe haven demand.” The Wall Street Journal put it succinctly:

The precious metal has long acted as a safe store of value during periods of heightened global uncertainty.”

As the WSJ explained, the focus on safe-haven investing has been largely overshadowed by speculation on what the Federal Reserve will do with interest rates in the coming months. The events in Paris jolted the market out of its Fed induced revelry, if only temporarily.

But Paris should remind us of a fundamental, underlying truth – gold serves as insurance for a crisis, and you can’t predict when the next one will occur.

Notice the price of gold spiked after the fact. Investors turned to gold on the Monday after the terror attack in what Reuters called a “flight to safety:”

In the first 10 minutes of Monday trade, nearly 3,000 lots changed hands, almost 10 times the 300-lot average for the opening 10 minutes over the past two months, Reuters’ calculations showed.”

This is all a bit like slamming the barn door closed after the horse escapes. The terror attack happened three days ago. It’s over now, but the risk was there all along – before the bombs exploded. The barn door was open.

To truly protect your wealth from the effects of a crisis, you need to own gold before it happens. In a truly cataclysmic meltdown, those trying to buy gold after the fact will find themselves in a very precarious position.

It’s like buying car insurance the day after you crash your car. Yes, it’s a good idea. But you’re a little late to the party, and it’s going to cost you a whole lot more money.

Some people still understand this. A recent Telegraph article makes this very case, pointing out that private individuals are buying record amounts of gold due to global uncertainty:

As fears grow about the outlook for the global economy the long term attraction of gold remains…the fundamentals, characteristics and attractions of gold are undiminished because we remain in times of extreme intervention by governments around the world, and for thousands of years gold has been the best insurance during times of uncertainty.”

In fact, the most recent report from the World Gold Council confirms this. Demand spiked in the third quarter of this year, primarily driven by investment buying and central banks.

As the Telegraph explains in its analysis, we’re seeing Gresham’s Law play out. Bad money is driving out good:

The Tudor financier, Sir Thomas Gresham, found that: ‘When a government overvalues one type of money and undervalues another, the undervalued money will leave the country or disappear from circulation into hoards, while the overvalued money will flood into circulation…’ Fast-forward half a century, and the money printing continues apace, while demand for physical gold is rising sharply. The latest government to devalue its currency to support the slowing economy has been China. The People’s Bank of China is cutting interest rates and allowing the value of the Yuan to fall. Chinese citizens concerned about their loss of spending power are buying gold. Gold is simply the best insurance against inflation, or deflation.”

Of course, China is not the only country engaged in currency manipulation. Peter Schiff has argued it’s only a matter of time before the US currency bubble pops.

As Paris reminds us and the Telegraph poignantly put it:

The future is uncertain and gold is the most effective insurance against that.”

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