Gold Beat All Global Currencies In 2014 Except The USD

Gold is money. Everything else is credit. ~J.P. Morgan in 1912

Loyal readers are no doubt aware that the U.S. dollar’s rising strength has put pressure on commodities such as oil and gold. I wrote about this as recently as my roundup of the top commodities stories of 2014, which you can read Fed Chairman Ben Bernanke over this very topic. When asked why central banks still insist on holding the precious metal in their reserves, Bernanke responded that it was simply tradition.

Tradition, yes, but the reason goes so much deeper than that. Gold has an intrinsic value that transcends its 'commodity-ness', something that’s recognized by nations all over the globe.

For example, we’re seeing a trend among European central banks seeking to bring their gold reserves back under their jurisdiction. Although Switzerland recently voted down a referendum that would have done just that, there’s talk now that Austria, Belgium and France are interested in shoring up their own gold reserves. The Netherlands and Germany have already brought some of their gold home.

China and India’s central banks are in a buying mood. Russia is currently snapping up gold at an astounding rate: 130 tons this year alone, up 73 percent from 2013.

Of course, if you’re Russia, buying that much bullion makes perfect sense. When your currency, in this case the ruble, is the worst-performing in the world, you sorely need something in your coffers with greater value, ample liquidity and no credit risk.

For the rest of us, gold remains an exceptional instrument to diversify your portfolio with. Despite its decline midway through the year, its price has remained relatively stable, much more so than oil’s.

What investors—especially the gold bears—need to remember is that bullion has a 12-month standard deviation of ±18 percent, meaning that its price action this year is well within normal behavior.

As always, I advocate a 10-percent weighting in gold: 5 percent in physical metal, 5 percent in equities, then rebalance every year.

Disclosure: Past performance does not guarantee future results.

Standard deviation is a measure of the dispersion of a set of data from its mean. The more spread apart the data, the higher the deviation. Standard deviation is also known as historical volatility. Diversification does not protect an investor from market risks and does not assure a profit. All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. By clicking the link(s) above, you will be directed to a third-party website(s). U.S. Global Investors does not endorse all information supplied by this/these website(s) and is not responsible for its/their content.

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Written By: Frank Holmes