Gold Preserves your Purchasing Power in Times of Crisis

Dear Reader,

It seems trite to talk about financial markets during a health and economic crisis.

But that’s our beat.

So that’s what I’ll talk about today.

I’ll just make one comment on the virus, for perspective. And to give you some hope.

In Australia, as of last night, there were just 1,258 active cases of the coronavirus. Of those, only two are serious or critical. There have been just seven deaths so far.

Last night, the federal and state governments announced a series of measures to stop crowd gatherings. If we use our brains and take this seriously, we may be able to stop the spread before it puts too much strain on our health care system and society as a whole.

Recent evidence of brain use, however, is not too comforting.

We can hope, though.

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The government’s overnight closure of pubs, clubs, indoor sporting venues, places of worship, cafes and restaurants (except for takeaway), casinos and cinemas will likely lead to more falls on the ASX today.

There is just no respite from the selling as stocks absorb more bad news on a daily basis.

What do you do then?

Cash, foreign currencies, and gold are the only safe havens. Cash preserves your capital. But thanks to a plunging Aussie dollar, you’re still losing out relative to foreign asset prices.

Gold preserves your purchasing power

Which is why gold priced in Aussie dollars is doing its job. Gold preserves your purchasing power in times of crisis. There aren’t many charts in the world that look like Aussie dollar gold (below) right now…


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Source: Optuma

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It’s up 20% so far this year. The market is down more than 30%.

That’s massive outperformance.

But smart investors are also looking at the ratio of gold to shares.

The chart below shows the ASX 200 relative to GOLD, which is the Aussie dollar gold ETF. As you can see, this is the cheapest shares have been relative to gold since at least 2003.


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Source: Optuma

[Click to open in a new window]

That’s not to say the trend won’t continue. After all, we’re in the midst of an economic storm. But it’s also telling you that your capital might be better served in quality stocks in the years ahead.

How will gold perform when this storm blows over?

Gold has done its job. The question is: how will it perform when this storm blows over? Which it inevitably will.

There is an argument that gold and shares could continue to rise together.

After all, central banks and governments are creating unlimited amount of cash, and will continue to do so.

Right now, the trillions that global central banks are collectively pumping into the economy are merely propping up a deflating credit bubble.

Investors, paralysed by fear, are holding onto cash too. Ironically, of all the asset classes, cash is the only one that central banks can create unlimited amounts of.

In an economic crisis though, cash is the only asset with seemingly unlimited demand. Everyone wants it. Everyone needs it. Until they don’t. Then there will be a torrent of it and its value relative to real assets will plummet.

That’s a story for another day.

For now, we’re in the thick of it.

Aussie stocks are set to open sharply lower again today. Company earnings will take the biggest short-term hit in history. Airlines and travel companies have already been hurt badly. As have banks, property trusts, energy stocks and sports betting companies. Casinos and hotels are next.

Expect more and more companies to go into trading halts as business grinds to a halt.

If the shutdown persists or becomes even more draconian, there is a risk the stock exchange itself will close. Should trading in shares continue when there are questions around short-term solvency and access to capital?

I don’t know the answer to that. But I do know that a debt dependent world runs on a just-in-time system for everything; including cash. No one has enough to get themselves through a crisis.

This is why you should expect to hear more from the reserve bank and government in the days ahead. The response has already been historic. It’s only going to get bigger.

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Amongst all the panic and fear, good investors should be on the lookout for opportunities. You haven’t seen a buying opportunity like this since 2008/09.

There is no sign of a bottom in markets just yet. But as the old adage goes, it’s always darkest before the dawn.

I believe you should at least be thinking about buying at these levels, not panic selling. There will be wonderful opportunities to come from this crisis. At some point, we will reach the maximum pain point.

It feels like every day is a maximum pain point. This is truly a historic event, both for society and financial markets.

The most important thing is to stay safe. If you don’t have your health, you have nothing. If you’re healthy mentally and physically, you’ll have a much better chance of taking advantage of this incredible bear market.

Until tomorrow…


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Greg Canavan,
Editor, The Rum Rebellion

Greg Canavan approaches the investment world with an ‘ignorance is bliss’ philosophy. In a world where all the information is just a click away at all times, Greg believes we ingest too much of it. As a result, we forget how to think for ourselves, and let other people’s thoughts cloud our own. Or worse, we only seek out the voices who are confirming our biases and narrowminded views of the truth. Either situation is not ideal. With regards to investing, this makes us follow the masses rather than our own gut instincts. At The Rum Rebellion, fake news and unethical political persuasion are not in the least bit tolerated. It denounces the heavy amount of government influence which the public accommodates. Greg will help The Rum Rebellion readers block out all the nonsense and encourage personal responsibility…both in the financial and political world.


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