When will gold go mainstream?

published 21 January 2011

I keep reading that gold isn't a contrarian trade anymore. People keep pointing out to me that gold stories are all over the press. That gold is now a hot topic of conversation among investors. I'm even told that some investment professionals are advising clients to pick it up.

But these stories don't mean anything. Gold is still a contrarian bet. It's far from going mainstream yet.

I want to show you why gold is still a reviled investment... a 'barbarous old relic' to coin a phrase. And what needs to happen before gold really goes mainstream.

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Why bankers hate gold

We all want a return on our investments. And with paper money, the bank promises you interest (though pitiful) as well as your money back. Interest is an easy concept to understand and it gives the bankers something to play around with on their spreadsheets.

But money breeds on money. Banks love paper money because they can take yours and lend out maybe nine or tens times that amount to others supersizing profits with a click here and a click there.

Gold, on the other hand offers no interest. It can't even be created, let alone multiplied! Gold merely gets shifted around, you take it out of the ground, and then shove it in a vault, or make some goods for rich people to flaunt.

And that's why it's hated. It doesn't fit with the needs of bankers, nor with investors that want money for nothing.

I can even see the argument for Gordon Brown selling off our gold reserves.

If you buy other currencies with the proceeds, you can put it into bonds and get interest in return.

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It's still contrarian...

In a sense, gold is not an easy investment to love. But at certain moments in economic cycles, paper wealth is an easy thing to hate. And that's how to look at it...

In the same way that paper money can be 'created' and multiplied, so it can be destroyed and decimated. Just look at the financial crash of 2008 and the commercial property slump that followed. Money got destroyed through losses, not many people avoided it. And this causes deflation, i.e. less money in the system.

Just look at this chart from the Office for National Statistics. See how quickly inflation turned to deflation at the height of the panic at the end of 2008.

And just as incredible was the bounce back out of the abyss. What's more you'll undoubtedly have seen in the papers that this inflation is still ramping up.

This self-inflicted inflation was all down to the tricks of the central bankers slash interest rates and create fresh capital.

Now, as you may know, I still believe we'll see a fresh deflationary scare as a result of another 'unforeseen' shock. That's when the central banks will go into QE overdrive.

And that's when gold may go mainstream.

Not until the next shock comes and you see scary headlines about the risks of a financial implosion will gold go mainstream. That may be the time for contrarians to consider selling in order to buy other cheap assets.

If I'm wrong about deflation and we short-cut straight to serious inflation, it doesn't matter the gold argument remains the same.

Hang on for the moment

Just because gold makes the news today doesn't mean that it's gone mainstream. I bet you most investors don't own it and don't want it in their portfolio. Most people don't understand this barbarous old relic.

Neither national banks, private banks, nor individuals, are keen why would they be? You just can't make the investment case on a spreadsheet.

So long as people have faith in their banks and paper wealth, that's how it's going to stay. Gold remains for the sceptics. We're not yet at the stage when the average punter wants it for wealth preservation.

And that's why gold is still contrarian.

This article was first published in the free investment email The Right side. Sign up to The Right Side here.

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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.