The Dow is down 3.9% in October, but gold prices have climbed 1.7%. That's because despite what the mainstream media says, gold is the best of all safe haven investments to own.
No asset has had as much history of purchasing power as gold. Fiat currencies are unreliable - they aren't tied to any asset of value. Their worth comes from government regulations and laws, which are subject to crumble over time.
"Gold was used as currency for centuries. In fact, it's still being used for transactions in places such as China, India, and much of the Middle East - regions that are eager to diversify away from the beleaguered U.S. dollar," Money Morning Chief Investment Strategist Keith Fitz-Gerald said. "As we face war, terrorism, and other ugliness, the need to hedge value is beginning to supersede the need to hedge price. Gold is one of the few assets with that capability."
Gold's status as the best store of value can be seen when gold prices spike during times of great geopolitical conflict. This year's conflicts in the Middle East and between Ukraine and Russia show how the two trends move in tandem:
The movement suggests people trust in the enduring value of the yellow metal more than governments and paper money, which are both prone to collapse. A similar effect can be seen when the U.S. stock market plummeted in 2008-2009 - gold soared:
Yet another example of this idea is the bank of Cyprus' failure in 2013. Last March, the country announced it would confiscate up to 10% of bank deposits. The news pushed gold up $24 an ounce on safe haven demand.
"Physical gold coins or bars are an unequalled safe haven, due to their liquidity and lack of counterparty risk," Money Morning Resource Specialist Peter Krauth said at the time. "It is the only liquid, universally recognized form of transportable wealth that is not simultaneously someone else's liability. That's what makes gold so desirable."
The yellow metal doesn't just protect investors because they can hold it outside of governments and banks. It's is also a valuable hedge because financial institutions themselves use it to buy on margin - when they go into debt, they use gold as collateral for the funds being borrowed. And they're buying on margin at an ever-increasing rate...
"Gold is increasingly used as a marginable asset, so it's tied inextricably to the worldwide explosion in derivatives and debt-driven trading," Fitz-Gerald said. "Debt drives markets, and the more debt there is, the more margin that's going to be required in the years ahead."
Central banks clearly recognize gold's safe haven value - they're buying it at a clip. According to Business Insider and the World Gold Council, central banks purchased more than 118 tons of net gold in Q2 2014. That represents a 28% increase over 2013.
"Between trillions in stimulus here at home and central bank buying in anticipation of a partially or totally asset backed currency a la China, you cannot afford to be without the shiny metal," Fitz-Gerald told his Money Map Report subscribers in late September.
To this very point, Krauth has referenced a quote that Russian lawmaker Evgeny Fedorov said to Bloomberg last year: "The more gold a country has, the more sovereignty it will have if there's a cataclysm with the dollar, the euro, the pound, or any other reserve currency."
"It sounds to me like gold is in fact the ultimate reserve currency," Krauth said. "It's just ironic that the center of the former communist empire is the country that 'gets it.'"
Money Morning's bottom line: Earlier this year, Fitz-Gerald gave Money Morning readers a gold investing "cheat sheet" to help them figure out how much gold to own, to the exact dollar amount. He recommended investors follow two steps...
First, allocate roughly $1 in gold for every $10 you have in bonds.
And second, maintain that ratio with a 20-minute annual rebalancing. (For a complete explanation, see Fitz-Gerald's article here...)
In a recent Money Morning interview, Jim Rickards - the Financial Threat and Asymmetric Warfare Advisor for both the Pentagon and the CIA - revealed that China is trying to do just that: It's buying up the world's gold at an astounding pace to increase its sovereignty and to destroy the U.S. dollar. You can listen to that interview here...
