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The right side of inflation

What is inflation

Inflation is defined as a general rise of prices for goods and services.  It’s a slow erosion of the purchasing power of currency and it’s generally accepted that a low steady inflationary rate is good for an economy. However with Inflation now running at twice the Government’s target it is not surprising that gold hasn’t lost its gleam.

People’s wealth is ultimately used in order to buy goods and/or services. Inflation affects the price of that good or service by making it more expensive and as such the spending power of currency used to buy these goods deteriorates.

The following factors influence our ability to keep up with the cost of living and the constant rise of these goods and services.

  • Unemployment –  at a 16 year high
  • Wages –  Flat and have not adjusted to reflect inflationary rises
  • Interests rates within Banks – below inflationary rates
  • Capital Markets – producing limited returns on investment and in some cases extensive losses

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Can we protect ourselves?

The factors above restrict us from keeping up with the cost of living and in many cases individuals end up losing money. It’s often difficult to qualify the effects of inflation as £100 in your bank account today will represent the same amount tomorrow. However, over a few years the same amount of money will afford you less and less as time goes on. Our clients represent people from all walks of life; from the ultra-high net worth individual to people of more modest means and they all require protection against inflationary effects.

It was once mentioned that an ounce of gold bought 350 loaves in the time of Nebuchadnezzar, the king of Babylon who died in 562BC. An ounce of gold still buys roughly 350 ordinary sliced loaves today, showing that over 2,500 years gold has proved a very effective hedge against inflation. People seek to preserve their wealth by placing their savings in gold thereby providing a store of wealth. Instead of inflation casting a shadow over one’s wealth – inflation lends itself to gold by enhancing one’s wealth over and above the cost of living.

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Investment herd: Baa Baa Gold Sheep

The first day of March saw gold prices fall as much as $100 an ounce as markets watched Fed Chairman Ben Bernanke for signs that the US economy would print more Dollars. When his congress speech failed to mention any plans of further stimulus the eager Dollar bulls gleefully took this as a positive sign for the world’s largest economy.With the Dollar rising in value on hopes that no more Quantitative Easing is required, demand for Gold fell. Up until Thursday’s fall, the price of gold had continued to rise handsomely this year so some active market participants also recognised the opportunity to take their profits already accumulated by selling too.

Follow the herd?

It’s human nature to feel comfort in a group and follow the herd. Perhaps seeing what others do first and then follow suit. The sheep mentality. We see this all the time within the investment world, especially with gold. A majority of investors will feel comfort by seeing others buy gold and the gold price rise accordingly and then invest themselves. When the market falls, these very same investors consider selling themselves in a panic, or at the least, wouldn’t dream of bucking the trend and investing more.

Insider's Guide to gold and silverHowever, it is the wise investor who leads the market and breaks free from the flock. It is the more experienced customers we have who have re-invested in  gold at the new lower prices. Quite simply they know that the gold price is volatile, they have assessed the reasons for the price fall, judged that the global economy hasn’t healed overnight, and are very happy to exploit the latest price dip.

Be savvy and break the herd mentaility

Many market analysts will agree that the price plunge was larger than warranted, representing a great buying opportunity. Afterall, Bernanke’s speech failed to suggest any change in Fed policy since their last conference. They certainly haven’t ruled out QE3. From a micro perspective we are still seeing good buying of physical gold coins and bars, coupled with relatively tight supply streams. Premiums on coins have held up well but have retreated from the heights of the panic buying periods we’ve intermittantly experienced over the past few years.

My advice, is to break from the sheep mentality and take a step back from the day-to-day economic news and data. Medium to long term investment should be taken with that timeframe in mind. If you think the global economy has some way to go before recovering then surely it is better to buy gold in price dips with coin premiums low, rather than follow the  flock and buy when supply is at its tightest and prices and premiums are high.