The biggest story of our lifetime

I like to think of us Right-Siders as an army of savers that make the most of what’s thrown at us. We will carry on, no matter what the crisis.

And one of the key weapons in our armoury – and one that I often urge you to stash away is gold. Yes, I know this is a difficult investment to make. But in this Right Side I’d like to offer a little bit of background intelligence on old ‘yella’. And why I think it’s so vital that you own at least 5% to 10% of your assets in gold right now.

Gordon Brown may have done a very shrewd thing 

Gold has never been held in such low esteem. Today this savings currency makes up around 1% (possibly 2% depending on which investments you count) of investable assets.

Now, if you’re a believer in modern finance and all its fantastic paper promises, this low figure stands to reason.

But be in no doubt, this is very much a modern phenomenon. Here’s a chart from Bullionvault to put the savings game into perspective. It shows what our central banks have been banking on over the last thirty odd years.

There has been a fundamental shift in economic thinking. Dump gold and grab paper…

Countries' gold and foreign exchange reserves

The role of the central bank must not be underestimated. By now we’re all well aware of the immense power wielded by the likes of the Federal Reserve, the ECB, or even our own Bank of England. But we mustn’t forget, these banks do much more than just play around with money supply and interest rates.

Central banks are the conduit through which nations trade. And they also store a nation’s savings. OK, so Western nations don’t have a lot of savings to talk of these days, but others do. And the chart shows something very, very interesting.

The central banks have taken exactly the same view as society at large. That is, gold is a barbarous old relic. It has no fundamental value. Why hold gold when you can hold interest-bearing paper?

And frankly, the central banks have been more right than wrong over the years. In retrospect it may look like Gordon Brown made an extremely bad call selling half our nation’s gold at the bottom of the market. But if you look at it from his side of the fence, you may see some logic…

Here was gold, costing money to store in a vault and yielding no income whatsoever. And yet he, along with the Bank of England, could trade in this white elephant and buy currency reserves instead.

As the chart shows very clearly – this is what most central banks were doing. If not dumping gold, they were certainly building up paper promises. And if you’re a believer in paper finance, it made perfect sense. Maybe we shouldn’t be so hard on old Gordon –or question his faith?

Why I have little faith in paper

All of my years have been lived under what you might call the paper epoch. Yes, born in 1971, it was the year that saw the final link with the global gold standard truly severed.

I have no memory, and no reason to hark back to the golden days. So why do I?

Well, it’s a matter of historical context – and faith. I guess the chart tells the story. Society has put all its faith in paper promises. And to a degree, I have too – that’s where the money is!

But as I frequently point out here at The Right Side, there are limits to my faith in this system. And it seems more people are starting to come round to my way of thinking. Especially the central banks.

Yes, the central banks that have any savings to speak of are gradually stockpiling gold. The chart is interesting. It shows that gold savings have risen (ever so slightly) over the last couple of years… But paper savings (the green blocks) – well, they’re growing faster still. Paper is rapidly appearing out of thin air.

Today’s article is not an attempt to try to explain the myriad reasons why and how this paper epoch is nearing its end. I just want to make the point that it’s not just me starting to take gold savings seriously. The guardians of sovereign wealth (nations that have any wealth) are increasingly turning to gold.

The chart is interesting. And I’m repeating it here, as I think it’s really worth your while taking it in:

Countries' gold and foreign exchange reserves

If (and it’s still a big if) the paper based system is called into question, then you can expect the gold price to go up some 15 times in order to get the gold/currency balance back to some semblance of historical normality.

But of course, any such event will probably call for much more paper printing. The gold price could well jump up exponentially.

The green blocks of central bank paper reserves are breath taking. The vast majority of them are IOUs issued by the US government. Other IOUs that are considered savings come from similarly dubious Japanese and European governments.

In order to pay the much vaunted interest on this paper, the governments simply print more of it. And so the green blocks continue to grow. Can this trick go on forever? Not likely…

This is not a religious newsletter. You put your faith where you like. But if you want my advice, it is tuck away between five and ten percent of your assets in gold.

Paper currency epochs tend to be short-lived – it may sound a bit cranky to put cash in gold, but if the worst comes to the worst, there’ll be a global rush for the stuff. To my mind, the slow rush has already started. If the dark green line heads back to pre-paper normality, then you’d better hold on to your hat (or should I say gold!)

• This article is taken from the free investment email The Right side. Sign up to The Right Side here.

Important Information
Your capital is at risk when you invest in shares – you can lose some or all of your money, so never risk more than you can afford to lose. Always seek personal advice if you are unsure about the suitability of any investment. Past performance and forecasts are not reliable indicators of future results. Commissions, fees and other charges can reduce returns from investments. Profits from share dealing are a form of income and subject to taxation. Tax treatment depends on individual circumstances and may be subject to change in the future. Please note that there will be no follow up to recommendations in The Right Side.

The Right Side is an unregulated product published by Fleet Street Publications Ltd.

Fleet Street Publications Ltd is authorised and regulated by the Financial Services Authority. FSA No 115234.

  • mik

    How does one obtain a copy of the Wealth Preservation Report mentioned in Toby Bray’s The End of Britain if one is already a subscriber to Moneyweek?

  • Nick Mayes

    You logon to the Moneyweek website, where it can be found under Special Reports. I note the report recommends investing in Japan, which is historically very cheap. However in the End of Britain report, a graph shows Japan’s indebtedness to be slightly above even the UK. I don’t fully understand why now is a good time to invest there. Surely they are equally doomed?

  • jagdish sanghvi

    Dear Mr. Saelensminde,
    I have been regularly reading your mail for some time . I was not convinced about gold earlier but now I am, and have invested already, without any regrets. I have a couple questions
    1) various video reports talk about a “secretive” group in a small town in Switzerland, etc; etc; etc. All this sounds like a fairy tale.
    2) Basel III norms to be applicable from Jan 2013, with such profound effect but no one is talking about it. Please elaborate on the truth and accept my thanks in advance.

  • Swallowcres

    Did Gordon Brown Sell UK’s Gold To Keep AIG And Rothschild Solvent; More Disclosures On How The NY Fed Manipulates Gold Prices?
    “There is also a credible speculation that the sale was designed to benefit a few of the London based bullion banks which were heavily short the precious metals, and were looking for a push down in price and a boost in supply to cover their positions and avoid a default. The unlikely names mentioned were AIG, which was trading heavily in precious metals, and the House of Rothschild. The terms of the bailout was that once their positions were covered, they were to leave the LBMA, the largest physical bullion market in the world.”

  • DrD

    I can see the case for gold, and the related (hyper)inflation and money printing arguments. What I can’t understand is how MoneyWeek can be so pro gold and so anti property/land?

    Both should do well via money printing and paper money devaluation, the difference is that land also generates an income. You could argue that property is slightly overpriced with respect to historical norms etc at the moment, but surely thats not here nor there if inflation takes off…

  • Roger

    People ignore the fact that since de-linking money from gold, creativity, intelligence (good or bad) finally get rewarded on an unprecedented scale. Do you think the society, will in any way, go back to something that is dead, and simply based scarcity? I do not think human society will accept it, and that will cause hovac to our social order. Why do not we go back to the old aritocracy society where land is the untilmate wealth symbol and have kings and queens to rule the world?

  • Andrew

    mik – here’s the link to the Wealth Preservation Report:

  • chris

    why is it only 10-15% into gold when the purchasing power of the currency is going down faster than you can obtain interest?

    The minimum should be 50% to offset the loss on the currency

    As for land from comment above I agree Farm land but not everyone has a few mil to purchase said farm.

    Personally all spare assets apart from the house you live in should be in PM’s as all other assets have a 3rd party risk and a 4th being paid back when you sell such assets with devalued currency.


  • Heath

    Come on people, it’s just a metal at the end of the day…

  • Lefty Goldblatt

    Did gordon not do us all a favour?
    By releasing the gold that gold bugs were then able to buy?
    He should be a hero to gold bugs.

  • dlp6666

    Holding gold SEEMS like an excellent idea – BUT in the recent ‘End of Britain’ Moneyweek letter, I learnt that:

    “In 1933, President Roosevelt signed executive order 6102, forbidding the man on the street to hold any significant amount of gold. In the midst of the Great Depression, the government basically made it illegal for anyone but them to hoard the precious yellow metal. Refusal to comply with these demands was met with a five year prison sentence”.

    So if there is another doomsday scenario and gold is outlawed again, it doesn’t look like such a good idea after all.

  • Vera

    I must agree that PM’s look like the future. but you cant argue with dlp6666, on the way previous governments have found a way to undervalue any asset that the “Little people” have managed to secure for their future well being?

    AND THIS IS EXACTLY WHY, GOLD WILL HOLD MORE VALUE IN OUR FUTURE THAN PROPERTY, you see far more people have invested their “Hard Earnt” in property, and therefore make a far larger target for bunkrupt governments. WATCH THIS SPACE.

  • Ernie

    I have worked to hard in my 80 years to have my government take away all my gains. I must also be able to past on some wealth without major taxation. Gold & silver seem to be the only answer to the madness of our government. 10% is to small & 50% is small if you want to keep your values….. I use paper in the bathroom.