Jarod Kintz once said, “The road to hell isn’t paved with gold, it’s paved with faith. Faith in a dollar that’s backed by a belief that people have faith in other people’s belief in it.” Sounds confusing? Don’t be. In layman terms, it basically means that you trust your currency because you think other people will accept it.
Jarod is not the only investor who is increasingly concerned about the USD, the Euro, and other leading currencies in the world. The current money printing policies and rising debt levels of some of the world’s largest economies are going impact on the future of the current financial system as we know it.
What other asset classes do we have?
So if “in the dollar we no longer trust”, what are the asset classes that we can trust? They have to be assets that have a utility value with no direct exposure to the banking and monetary system. These assets could be land, property, diamonds, gold, silver and other precious metals or collectibles such as art.
But do these investments really offer good protection against a financial crisis and what are the risks involved? History suggests “yes” when we look at gold. The US dollar, for example, has lost over 98% of its purchasing value since 1913, whereas gold has increased (in dollar terms) by a factor of 60 over the same time period. Again, in layman terms, that means it is better to be holding gold than to be holding cash, as cash loses its purchasing value extremely quick.
The downside of these asset classes
Protection, as every hedge, does come at a price. The first of which is that these assets can be subjected to very strong short-term price fluctuations that are unpredictable. For example, you could reasonably expect that SGD$5 should be able to buy you a plate of chicken rice in a foodcourt even if you were to leave it in your pocket for the next 6 months. Put it in a commodity in Gold and it could be anybody’s guess how well it does. So investors should be able to invest with a long-term horizon.
Secondly, most of these investments carry a holding cost. The valuable needs to be stored, maintained and serviced. On top of that, there is the risk of falling into a scam and buying rubbish. Buying these precious investments require good knowledge and reliable counterparties. Unfortunately, this scenario does attract dubious characters hoping to find a naïve punter to take for a ride.
Finally, it is important to ensure that the asset is really a pure non-financial asset and that there is no counterparty risk in holding the asset. Holding gold in a bank account is not the same as holding physical gold in a safe.
When it comes to precious metals and small precious items, there are several places in Singapore to safely store them. One such professional firm is Silver Bullion. Their Head Office is in the Certis Cisco building at Paya Lebar. Retail clients can also consider Vault@268, which is situated at Orchard with state of the art safe deposit boxes. Silver Bullion not only stores but also sells and buys silver and gold bullion and coins. Vault@268 offers safe deposit boxes.
Non-financial assets have proven to be good defensive investments, particularly in periods of turmoil. Most serious investor will hold some of them in their portfolio. If you believe that we are not immune to periods of financial turmoil, it may be worthwhile to start reviewing your options and hedge your current bets.