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Gold as a Hedge Against Volatility

August 9th, 2016 by

Ed D’Agostino of Hard Assets Alliance quickly sums up the state of geopolitics at the moment:

“The U.S. election is rapidly approaching. Brexit looms large over the European economy. Rogue terrorists attack without warning and the migrant crisis continues to threaten Europe’s security.

In the face of such volatility, it’s more important than ever to think about protecting your home, your family and your wealth.

The best way to hedge your bets and protect your family’s nest egg against a roiling economy is to invest in gold.”

Correctly, he points toward gold as the ideal hedge against volatility. In addition to the various sources of global unrest and the attendant financial turmoil, the main reason this axiom about gold is truer now than ever before is because of the ongoing global race between nations to devalue their respective currencies—in other words, Currency Wars.

Using Gold to Measure Currencies

currency warIf you’re unfamiliar with the term “Currency Wars,” coined by economist and gold expert James Rickards in his book of the same title, it’s simply a characterization of the foreign exchange markets as a “race to the bottom”: every country is trying to devalue its currency faster than its counterparts in order to compete in foreign markets.

By making your currency cheaper, a country can undercut their competitors by making their exports more affordable and more attractive. This, however, is not reassuring to investors and savers who see the value of their money eroding.

Virtually every nation in the world is engaged in this kind of currency manipulation. Even traditional safe havens such as the U.S. dollar and Swiss franc must be kept from rising too much through aggressive monetary intervention.

With this in mind, it’s not a stretch to say that nobody’s currency is particularly stable. You don’t have be a firebrand who can’t stand the fiat currency regime to hold this point of view: even mainstream financial analysts will tell you how volatile the foreign exchange (forex) market is in the absence of any kind of gold standard. Take a look below at the performance of the Japanese yen, another “traditional safe haven currency,” over the past five years when measured in gold.

Source: LFB.org

Source: LFB.org

Pretty choppy, to say the least.

Central Bank Intervention

The story is the same no matter where you look. We seem to be reaching “peak central banking,” which cannot go on indefinitely. Even the mighty U.S. dollar, the world’s reserve currency, is not immune to the inherent instability of fiat money.

D’Agostino explains,

“A domino effect kicks in as the dollar gains strength… a strong dollar leads to a drop in U.S. corporate profits… leading to a drop in the stock market… leading to an easing of monetary policy, intended to prop up the market and U.S. companies.

All this intervention on the part of central banks comes with risk. Central banks are not all-powerful, and they are in uncharted waters. The world has never seen central bank intervention to this extent, for this long.”

gold-eggAs he recommends, the stable value of a tangible asset like gold is the best remedy for this worldwide mess. Although we frequently refer to this strategy as “hedging,” in some ways, D’Agostino enlightens us by essentially saying gold is an investment in volatility as much as a hedge against it. This is similarly the view of legendary bearish investor Marc Faber, who recently shared his forecast for a huge downturn in global finance just beyond the horizon.

Uncertainty, volatility, and instability are all the signs to the savvy investor that it’s time to buy gold (before it’s too late).

 

The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.