The Swiss vote ‘No’ – but there are good reasons to own gold

It was the last stand of the gold bugs. And now it’s over.

On Sunday, the Swiss held a referendum on returning to the gold standard.

The ‘Save our Swiss Gold’ plan would have forced the Swiss National Bank – the central bank – to hold 20% of its reserves in gold. If that had happened, demand for gold would have surged, simply to meet the needs of the Swiss.

But in the end, 77% voted against the plan.

So is it time to ditch your gold?

Not at all. It might not like being told what to do with its reserves, but like most other central banks around the world, the Swiss Central Bank still holds some gold. And you should too.

The rational person’s guide to owning gold

Fans of gold are often seen as irrational. That’s because they often are. Some people become very emotionally attached to gold, which is a mistake with any investment. In fact, the only two assets I can think of that arouse as much emotion in their owners are British houses, and Quindell shares.

When people get emotionally engaged with their investments, they often turn into twits, to put it gently. They get stroppy and defensive and they refuse to listen to sensible arguments or to accept that the price of the object they love can go down as well as up.

Of course, gold also arouses equally strong reactions in some of those who don’t own it. Lots of intelligent people simply don’t ‘get’ gold. They’ll quote the whole “barbarous relic” line from Keynes, and talk about how gold is only valuable because people believe it has value. It has no ‘intrinsic’ value.

Instead, they see the value of gold as being rooted in a psychological flaw in the rest of humanity. In short, “gold is worth something because all of these other idiots think it’s worth something”.

Willem Buiter from Citi put out a research note along these lines the other day just before the Swiss vote, arguing – a little mischievously – that gold was a 6,000-year bubble.

I don’t have a lot of time for either extreme. There are sensible, rational reasons to own gold as a portion of your portfolio, and it’s got nothing to do with ‘faith’.

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Sensible, rational reasons to own gold

Here’s why I like gold – it’s an asset class all to itself. It behaves differently to stocks. It behaves differently to bonds. It behaves differently to property. It behaves differently to cash. And it also behaves differently to other commodities.

There’s a reason for this. Gold is about the only asset in the world that has value independent of a counterparty.

Companies go bust – shares and bonds follow. Governments go bust – government bonds follow. Property is easy to confiscate (ask a wealthy Scots landowner how secure they feel right now – go on, I dare you). And cash – history is full of examples of currencies that have gone down the toilet.

A lump of gold has no counterparty. It’s a lump of metal that most people throughout human history, and probably into the future, recognise as having value.

So when concerns about creditworthiness in the system reach breaking point – which happens more often than market theories would predict – gold comes into its own.

That’s why it behaves differently to other assets. And that’s what makes it a key part of a diversified portfolio.

Oh, and there’s a reason why it’s specifically gold that fulfils this function. It’s not just because humans like shiny things. We aren’t giant magpies.

Remember your periodic table from your chemistry lessons? (My apologies for any panic-stricken flashbacks that might trigger.)

To cut a long story short, very few of the elements on that table work as a long-term store of value. Gold works because it’ll stay put (it’s not a gas or a liquid under normal conditions). It’s not going to give you radiation poisoning. It’s very unreactive – so it won’t rust or rot.

In short, if – as a species – you have need of a reliable store of value, then gold works better than just about any other raw material.

So I think it’s sensible for anyone to hold a small portion of their portfolio in gold – between 5% and 10%, say. That’s pretty much regardless of what else is going on.

There’s another reason I’m hanging on to gold

Now, I’ll certainly be interested to see what happens to gold over the coming week. If anything, I’m surprised it’s held up so well in recent weeks. If you were looking for reasons to throw in the towel, you’ve had plenty of them in recent months.

The strong US dollar, the collapse in oil, and now the Swiss vote – those are all negative for gold (gold and oil often move in the same direction, while gold and the US dollar often move opposite to one another).

But I’ve no intention of selling my holding of gold. There’s always room for insurance in a portfolio, of course. But right now, I’m particularly keen to have some protection against disaster.

You see, broadly speaking, I’m very pleased about the slide in the oil price. But I’m also concerned that there’s an outside chance that it could trigger the next financial crisis.

We’ll have a more in-depth look at this topic in the next issue of MoneyWeek magazine, out this Friday. If you’re not already a subscriber, get your first four issues free here.

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  • Graham Wadsworth

    You say this about gold. “It’s a lump of metal that most people throughout human history, and probably into the future, recognise as having value”. So John. How do you value it? There is no free market in gold. It is dug out of the ground, melted into bars and put back into the ground again. It has a perceived value, just as a worthless piece of paper we call a £10 note has a perceived value. Imagine a disaster hit the world and food was extremely short. You have your bag of gold whilst the rest of us in our group have pigs, sheep and grain. Why would we want to trade our precious commodities with you in return for your gold? If I had a surplus pig, but was short of grain, I would be better trading my pig for grain. Why would I want a metal that I could not eat and had no practical use? In other words, your so called valuable gold would be worthless.

    • Neil Pepper

      @ Graham Wadsworth
      What if the man selling grain had no need for your pig? You would have to give him something else of equivalent value for his grain, such as a currency that he could use to trade with later for something he does need.
      Which currency do you think he would value more in your imagined world disaster scenario; 300 pieces of paper with George Washington’s face printed on it… or a 1/4 ounce piece of 22 carat gold?

    • SodThat

      When the economy collapsed in Argentina they moved to a barter economy, there was direct trade as you point out but the problem was finding someone that wanted what you had and you wanting what they had. However everyone accepted gold and silver, and note just bullion either. Those that had linked chains would remove all the links and use those individually to buy goods. Gold and silver pawn shops popped up everywhere. The simply fact is people still see value in gold and silver and are happy to accept it as payment in bad times. As long as they have a market value they have worth and I doubt that’s ever going to change. The only reason gold is being pushed as a ‘barbaric relic’ is because the power mongers want us to believe in their fiat because that makes them rich.

      I’ve never understood the for and against arguments for gold, if you don’t like it don’t buy it, if you do like it then buy it. Why do people care so much about what others are spending their fiat currency on?

      • Graham Wadsworth

        Neil. In that situation, I would probably not deal with the man, but if I did, it would be on the basis of a promise. I would let him have my pig today, if he promised to let me have a couple of Spring lambs next year. In other words, in my imagined world, food would be the over riding requirement and necessity, not a metal of no practical value. I might be persuaded to accept steel instead of gold, particularly if it was shaped into a ploughshare. SodThat. You say that people see value in gold and as long as people do that, it can be used as a means of common exchange. In my primitive scenario, I do not think that people will see a value in gold. I have never invested in gold, becausue I could never work out how to value it. If I bought gold today, it would be merely in the hope that someone will pay more to buy it from me tomorrow. That does not seem to be a firm foundation on which to make an investment.

  • Pinkers Post

    Politically, the outcome of the referendum makes sense. Gold now doomed? No, but still too expensive. Gold is and will remain the ‘premier’ currency. No other currency, including the dollar, can match it. However, it, too, is subject to supply and demand and after a decade long party, the current negative sentiment makes perfect sense. Indeed, it is healthy and entirely normal: ‘Bold on gold!’: