Go for GOLD!

Since January 2008 the gold price has just about doubled from US$800 to a current price in the region of US$1600. This was mostly due to the volatility of the financial markets and the need for investors to place some of their wealth in an asset that would serve as a hedge to the risk inherent to the investment markets. I strongly believe that no other investment asset could even come close to such a return on a risk adjusted basis. Yes, obviously there are some risk in terms of that the actual returns that gold will generate will not be adequate, but in terms of a global financial currency melt down – gold will most probably be the most valuable commodity and measure of value – thus, if all else fail, gold should still be of value – massive value!

Recently a conversation resulted in the following question. Should you invest in gold bullion or gold stocks? To me the short answer of this is to rather invest in the bullion. The reason for this would be that investing in the bullion not only makes for a good investment option in terms of expected return, but also as an effective hedge to the risk of the local currency losing its value, or even to act as the only real store of value should the world experience a total financial melt-down. It serves as a local and international hedge to financial crises’.

Inherent to investing in a gold producing company’s stock is to also invest in the company’s management, operational and business practices and the company’s specific financial risk due to its financing and capital structure. So, while investing in the gold company’s stock may result in equal or even better returns than investing in bullion, it most likely do not provide the hedging or risk advantages that bullion offers. In short – you do not solely invest in the commodity, which may actually be what you intend to or need to do.

In the unlikely scenario of for instance a SA political problem or even war (which I know is unlikely – just using as an explanation for the argument) – any asset priced in Rand currency would most likely lose a huge amount of value – very quickly. In such a scenario holding foreign currency would be a life saver, since the local currency would be rendered worthless within a short while and most other fixed or financial assets would become illiquid and most likely worthless (People seem to forget quite fast that those millions of Rand’s worth of properties they own are only worth as much as someone is willing to pay for it). Gold not only provides an excellent hedge for such a scenario (being that its value is measured in US$), but also provide great return opportunities – given the current world economic trend.