Expat financial planning with gold
It comes as a surprise to many people, including expats, to learn that gold is actually ‘money’. Money is that which is capable of acting as a medium of exchange in non-barter transactions and also acts as a store of wealth. Being a store of wealth necessarily requires that the purchasing power of this so called ‘money’ is maintained.
The paper currencies in circulation today are NOT money for the simple reason that they cannot act as a store of wealth. Paper currencies can and are printed out of thin air which results in automatic devaluation of the paper currency already in issue. The rise in commodity (real assets) prices and real estate prices since 2001 is proof that paper currencies do not maintain their purchasing power against real assets.
The history of money
For much of the history of the world, the function of money has been performed by gold and silver.
Paper currencies began as gold receipts that acknowledged real deposits of gold and silver coins and bars. It was convenient to carry these paper notes, which could be exchanged back into gold and silver after transactions. These paper receipts eventually evolved into banknotes.
It wasn’t long before gold and silver depositories were issuing more receipts for gold and silver than the physical metals that they held and thus began the fiat currency era. Central banks followed suit and when the US decided to cease redeeming their currency for gold in 1971 the world formally moved from a commodity based gold-standard monetary system to a literally ‘faith based’ system. Faith based paper fiat currencies have no economic validity and whenever such currencies have arisen, it has been a very brief existence that always ends in financial disaster.
It is an accepted economic concept that anything being used as money should be a commodity and therefore a tangible asset that requires real resources to produce.
Gold fits the money criteria perfectly. It has intrinsic value and requires real resources to produce. It is universally recognised and is uniform (unlike diamonds) and it is virtually indestructible (unlike silver which is highly reactive). It cannot be printed at will and takes real resources and work to produce.
The price of goods and services in gold used to be determined by the supply and demand of those goods and services. Gold was and still is the natural choice as the world’s medium of exchange and store of wealth. Gold is the enemy of all fiat paper currencies. Up until recently and for thousands of years, global gold supply was more or less balanced with global demand and global economic growth. That is up until recently.
Central bank reserves
A growing number of Governments are increasing the gold reserves that they hold. Russia is increasing its gold reserves from 5% to 10% of its total reserves. While this is not an enormous amount of paper currency, it is a very large quantity of gold. It actually represents one quarter of the entire annual world production of gold. Russia’s foreign currency and gold reserves now stand at over 250 Billion Dollars, the fourth largest in the world and are set to rise by around 100 billion Dollars annually as a result of its oil and natural gas exports. 10% of all future increases in Russian reserves will be allocated into gold as well.
Many of the other large oil producing countries are following suit and China is looking to diversify away from its mountain of US dollars into gold and other real assets.
The flat earth society
Gold is money. The fiat currencies in circulation today are not money. It is taking more and more paper currency to buy real goods. Gold like water, is finding its own level.
Hard assets are the best protection against the falling purchasing power of fiat currencies. Gold has actually risen further than real estate prices since the dot.com bubble burst and that from an almost thirty year low in real terms. In December 2005 global real estate was already in the biggest financial bubble of all time. While there can be no doubting the strong fundamentals of real estate as a hard asset, the medium term prognosis is not bright.
Professionally exam qualified financial advisers can help you design a portfolio with the right mix of all the available asset classes that will deliver what you want, when you want it and how you want it, with the flexibility that you need.
Follow the yellow brick road.
Richard Colburn is a UK qualified financial adviser with Sterling Assets.
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