Gold as a Recessionary Investment
If you are interested in investing in gold, get to know David Morgan, who is a well-known expert and consultant on precious metals. He publishes The Morgan Report On Metals and is a featured gold analyst for TheStreet.com.
Here's what he had to share in a recent phone interview:
Bright Hub (BH): Why do you consider it to be the best recession investment?
David Morgan (DM): Gold was proven the best recession investment under a study done by Dr. Roy W. Jastram. In The Golden Constant, he showed that gold actually does best in a deflation not inflation. What we know from history is gold is an excellent investment in deflationary or recessionary times.
What Jastram found is gold’s purchasing power increases in real terms and we are finding that to be true as well. A quick example that everyone can understand easily is that if you looked at the Dow Jones Industrial Average (DJIA) in terms of gold what you’d find is the Dow is going down. In other words, it takes fewer ounces of gold to buy the DJIA than it took to buy it 10 years ago.
You are measuring the goods and services you could buy with gold. In real terms, you are actually increasing your purchasing power as housing prices are deflating, the Dow Jones is deflating and all these assets are going down in price. Gold increases your purchasing power. So that’s the idea, gold’s purchasing power is increasing while you are having a recessionary environment with housing and the stock market.
BH: What portion of their investment portfolio do you suggest that they hold in gold or other bullion products?
DM: For most people, 10% is enough. If you are super concerned, you could go to 20-25 %. I’m not advocating that anyone put all their money in precious metals.
BH: Would you explain immediate versus future delivery?
DM: Well, it’s pretty self-explanatory. Immediate delivery is also called spot market or over the counter (OTC) market, which if you can picture walking up to a bar and buying a drink, that’s an example of OTC. So OTC or spot market is when you go into a dealer, whether that happens to be the small coin dealer on the corner to the COMEX itself at the Chicago Mercantile Exchange, you plunk down cash that day and you immediately get delivery of your silver or gold. So it’s a cash transaction that takes place in the moment or immediately.
Future delivery is based on a contract made between two parties or two entities to deliver a certain amount of metal at a certain price at a certain time in the future. That’s all it is.
BH: What other types of bullion products are trending?
DM: All the metals are trending up in the long term. Gold is leading right now but from the beginning of the bull market (roughly 2000 to the present), the major overall trend has been up and that trend continues to be up.
BH: Is this a “fever"? When will it break?
DM: There’s no fever like gold fever. What we are seeing right now is what I would consider to be a mini fever that is definitely grabbing the attention of all kinds of individuals, but this is not the gold fever that I expect to see within the next few years. I think, and I could be wrong, that the financial system is reaching the point of no return, and there will be even greater interest in gold a couple of years from now. To me, this is a precursor of the really huge gold fever we will see. I think gold could double over the next three years or so.
BH: What is the risk versus reward?
DM: The downside of gold is that it does not pay interest. Like any investment you can name, the price fluctuates so that’s really no better or worse from that aspect, but the drawback is when you put your money to work, most people want to put it where it will earn interest and gold doesn’t pay interest.
However, although gold doesn’t pay interest, since interest rates are so low it really doesn’t matter that much. Clients say, "Do I choose gold that doesn’t pay interest or do I choose paper money with an interest rate that is so ridiculously low that it really doesn’t matter?"
The interest is probably going to be eaten up by inflation anyway. Gold is performing much better than the dollar so there’s a lot of movement from what traditionally might be money in interest to gold.
BH: Are most people investing in physical gold?
DM: Generally, retail investors are buying physical gold (coins) and professional investors invest across the board in all kinds of gold products.
BH: What are some of the pros and cons of owning physical gold?
DM: One of the cons is gold is a high unit worth; one gold coin is almost $2,000 so with anything that valuable and fairly small there could be concerns about loss or theft.
The pro is gold is recognized as money anywhere in the world so it is the most liquid asset you can own because it is easily transacted anywhere. You can’t sell a share of Boeing stock in India but you can easily take a gold coin and basically do almost any kind of business with it very easily. That holds true for China, Taiwan or any place you would care to name. With most other investments, you need to have a middleman in between you and the final seller.
BH: Money News reported on May 27, 2011 that Utah is currently accepting gold and silver coins as legal tender, while South Carolina is considering legislation to make precious metals legal tender in their state as well. Minnesota, North Carolina and Idaho are looking at the Utah law as their model and experts are predicting that more states may follow suit as faith in fiat currency with no backing dwindles.