The inconvenient truth about gold

Many people buy gold in the hope of making a big return. But that's not the point of gold, says Bengt Saelensminde.

We expect long-term savings to deliver many times what we put in. That's what we've all come to believe is the norm. It all comes down to the beauty of compound interest.

But if you think about it, essentially what the compounding idea says is that for every hour's work you save (instead of spending) today, you can expect to get several hours of someone else's work in the future. How can that be?

Let me just explain the theory.

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The cash you've saved is put into some whizz-bang investment that helps to create production gains in the future. I'm talking about innovative new products and technologies that mean tomorrow's workers should be able to produce more.

And thus the next generation can afford to not only put food on their table, but on yours too. It's all down to productivity gains. That's what's going to allow you and your chums to retire to the bowling green.

What a fantastic theory. And when I say fantastic, I mean just that: it is a fantasy.

While this may have worked for some people, some of the time in the past, the inconvenient truth is that it won't support the number of savers currently expecting a comfortable retirement.

You might not even get a positive income from your savings at all

What if in the future, you only get back one hour of someone else's work for every hour you save today? Now that would put a nasty dent into most savers' retirement plans. Most people are expecting the real value of savings to grow many-fold.

From what I can see, we've run out of productivity gains to deliver on those promises. Essentially savings will struggle to keep up with inflation that means no real growth' and therefore effectively no compound interest.

Things were different in the past. The industrial revolution marked the beginning of a period of tremendous productivity gains. We had a second industrial revolution as a result of cheap oil. Many will say we're currently living through the technological revolution. But I've got to say, the jury's still out on that.

Unless this revolution starts showing some clear signs of progress, we're in trouble. Without a substantial technological stimulus to increase productivity, most pensions will become nothing more than Ponzi schemes. That is, schemes that only work so long as new savers pump in more and more money.

I'd even go as far as to say financial savings may deliver less than one hour's work in the future for every hour you save today.

Now that really would be a miserable state of affairs. But that's exactly what's been happening in Japan for more than 20 years. Having ridden a tremendous productivity wave during the 70s and 80s, Japan suffered a dramatic U-turn during the 90s. Stock market returns are still in negative territory.

And here, too. In ten years the FTSE has barely gone anywhere. Today most savers seem trapped in investments that are set to grow at a slower rate than inflation. That means going backwards!

Why I think now is the time to invest in gold

Let's go back to that old truism about gold. History tells us that during Roman times an ounce of gold would buy a well-heeled man a tailored toga and associated paraphernalia (sandals maybe... I don't know).

And with gold selling for around £1,000/oz today, it turns out that it'll get you today's equivalent from a Savile Row tailor with a nice pair of brogues thrown in.

What does this tell us? Well first off, it tells us what a terrible investment gold is over the long term. Even after two millennia, all you'd get from gold is much the same back again. Hardly a ringing endorsement!

But there's another very important point. And that is, it's not during the good times that gold comes into its own. It's during the bad times.

There are times when you'll be happy just to keep your purchasing power. And I would say that now is such a time.

Why the savings Ponzi scheme could be about to burst

Short of some technological miracle, I think we're looking at the bursting of a savings Ponzi scheme. The evidence is all around us: negative real' returns litter the financial sphere; politicians and central banks meddling with our currencies; many economies going backwards probably with many more joining them this year.

This is when you need gold.

As financial returns turn negative (perhaps deeply negative), I expect precious metals savings to hold their own especially in the light of increased money printing. During times of financial turbulence, it's quite normal for gold's purchasing power to increase many times over. That's why we need to keep some tucked away.

For every hour's worth of income saved in precious metals today, I expect to get many hours of future labour.

The fact that gold doesn't give you any income should not bother you. For the moment just keep in mind that many standard financial savings offer negative returns. And without some serious breakthrough in productivity, that could be set to get an awful lot worse.

The FSA does not regulate certain activities, including the buying and selling of commodities such as gold.

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

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The FSA does not regulate certain activities, including the buying and selling of commodities such as gold.

Bengt graduated from Reading University in 1994 and followed up with a master's degree in business economics.


He started stock market investing at the age of 13, and this eventually led to a job in the City of London in 1995. He started on a bond desk at Cantor Fitzgerald and ended up running a desk at stockbroker's Cazenove.


Bengt left the City in 2000 to start up his own import and beauty products business which he still runs today.