I recently started a blog called The Coloured Paper where I post articles on all things gold, silver and money. Do drop by for more and I hope you enjoy this one!

Ever wondered why we have this uncanny relation between the rich and gold? It's actually really puzzling why the rich are hoarding it, given that gold does not give you back anything for holding it.

With central banks stocking up their gold reserves to highest levels since 1974, why are the states, along with the wealthy, buying up all the physical gold they can find today?

What is gold?

Right off the bat, gold is the most unproductive asset in the world. Bonds pay you coupons, stocks pay you a dividend and real estate pay you rental income. Gold pays you nothing as an asset.

Gold is a uniquely yellow block of metal that is mainly used as a form of jewelry and interestingly enough, as a material for technology due to its metallurgical properties.

Doesn't seem like a cool thing to own. So why is it so sought after by the ultra rich?

Gold preserves wealth, cash destroys it

The value of something is determined by supply and demand. Because gold’s supply is not easy to increase due to finite and dwindling underground gold resources, that leaves its value to be more or less determined solely by demand. And with a stable consumption of gold over the years, gold serves as a good store of value.

Because of this, gold is widely seen as a good preserver of wealth and is coined (no pun intended) as ‘hard money’ based off of the fact that it is hard to produce.

On the other hand, the cash we hold in our hands is termed as ‘easy money’. This is because it is so easy to increase its supply just by a word from the government’s mouth. New dollar notes are simply printed into existence when there is a need for them to spend more than they can. More on this in another article.

In actual fact, cash like the SGD we own cannot be actually called ‘money’ because of this since it is not a store of value. Instead, it is called fiat currency because it is not backed by anything ‘hard’, but just the government’s promise that your cash is worth what it is; which makes it so easy to produce.

The more supply there is, the lesser the value -** **think of a bubble tea becoming diluted with more water added. Below shows the money supply of Singapore Dollars (the amount of SGD in our system) over the years.

This is the very reason why we pay more for our chicken rice today than ten years ago. Each dollar note we hold is worth lesser and lesser in value as the government prints more and more of it. Our cash’s purchasing power is eroding over time.

Therefore, the rich avoid holding onto too much cash, and instead converts it into a form of ‘hard money’ instead in order to protect their wealth. They only hold enough cash just to stay liquid for emergencies and to pounce on enticing investment opportunities.

Gold is a form of insurance

We see that the market goes up in the long run because we look at its historical performance. Indeed, the general direction of the market has always been up ever since the 1900s and this hindsight view is the very reason behind the confidence of many investors in the long-term direction of the market, including myself.

For the same reason, we ought to consider the failure of every fiat currency in history. Not a single fiat currency has survived the test of time and the average lifespan of a fiat currency is 35 years according to a study done by the Gini Foundation.

Fiat currencies fail when governments hyperinflate them into oblivion by excessively spending on a deficit (spend more than they can afford to). And when it does, people lose confidence in their own cash and flock to gold in a last-ditch effort to lock in the value of their dying cash.

Prime examples of this are the fall of the Roman Empire and Germany’s hyperinflation in the early 1920s where the price of gold skyrocketed in the face of uncontrollable hyperinflation.

What’s alarming is that this is the first time the entire world is run on fiat and each currency is dependent on one another in this modern interconnected world where countries hold one another’s debt.

Just based on history alone, maybe the question we should be asking is not will a systemic failure across the world happen, but when?

The rich hence buy gold to insure themselves against a fiat currency crisis if it ever occurs, creating a wealth transfer like no other. When fiat fails, their other assets pegged to fiat currencies like stocks, bonds and real estate might not even be able to save them.

As Philip Diehl from the U.S. Money Reserve says, “Gold is a wealth insurance, rather than an investment vehicle”.

Even central banks around the world are bulking up their gold reserves to insure themselves against the inflation they caused. Interesting…

Why Physical Gold?

You can buy gold stocks or ETFs for cheap, with low commissions, and sell them off as quickly as you got them. It's the perfect way to own gold you might think.

So why aren't the rich solely buying these 'paper' gold? Even central banks are going through the trouble to buy and store physical gold instead of buying up gold stocks.

A big misconception about physical gold is that it's an investment. An investment means you expect the invested capital to grow in size or generate you income.

Paper gold, which are financial instruments related to gold, will do just fine as an investment. You are basing the performance of your gold investment by its price to grow your capital.

However physical gold is different. Physical gold is not meant to be an investment, but a conversion of your dying fiat currency into another kind of money that retains its value over time. It is a vehicle for wealth preservation.

Furthermore, since gold is regarded as insurance against the fiat currency system, it also makes sense to have it in its physical form stored somewhere accessible to you and only you, and not in the financial system that runs on fiat.

This should answer why we always have that idea of gold bars and safes going hand-in-hand.

Summing up,

Gold is not an investment, but a form of wealth preservation and insurance against the system run on dying fiat currencies. The rich, alongside state-run central banks, are stockpiling gold for this very reason.

However, it is not just any kind of gold. It must be physical gold as it is completely detached from the fiat system we want to be insured against.

We can learn a thing or two from what the rich do. By owning some gold in our portfolios, we put ourselves in a better position to preserve generational wealth that we can pass on to our children and at the same time, protect ourselves from the historically-supported inevitable.

Note:

Gold is not perfect and I myself see risks in holding gold. After all, to be rewarded, we must take on risk.

I would love to discuss the risks here as well however it will make the article way too long for a casual read. I will be writing another one on risks instead. Thank you and I hope you took away something of value from this article!