One of the most wildly successful asset-based investments for the last few years has been gold. While it’s hard to describe what it is that actually creates value for gold investors, the returns speak for themselves. Investors speak with their dollars, and the price gold has shot through the roof, and continues to demonstrate opportunities for future investment. That being said, I don’t like this asset one bit. While I’m not smart enough (or brave enough) to publically call bubble on this sort of thing, I am confidant sitting out on this roller-coaster.
While I strongly believe that there is a place for gold in a personal portfolio, I believe that investors may soon begin to change their positions to turn gold on its head. Remember, gold acts as a store of value. Someday, investors are going to take the savings they’ve stored in gold and cash them in for a new car (I wish). Over the next few articles, I’m going to describe how these sudden flip might impact your portfolio across its different asset classes, beginning with your currency-holdings today.
This might sound a bit obvious, but a fundamental aspect of gold is that you need to buy it with money. As investors gobble up gold, they are flooding the market with cash and sucking up the product itself. This means that currency prices will decrease, and gold prices will increase, which causes the real price of gold to actually increase from two separate directions at once. That being said, the opposite is true for when the market for gold turns around. Investors will begin dumping gold in exchange for cash of all denomination.
The end result will be a massive decrease in the value of gold, and a spike in key currency values. Specifically, the USD and Euro will likely experience a massive upswing, while the currencies of gold producing countries might experience a decline over the longer term. This is because gold producers will need to begin scaling back their expansions and begin focusing again on cutting back their margins.
While the impact of currency swings on a personal portfolio is generally immaterial, the indirect effects can prove to be somewhat more disruptive. For example, as commodity producers in countries with negatively impacted currencies begin to renew their currency hedges, will they need to pay more for the volatility? What about loan rates for property companies, or even bond yields? All these impacts will be discussed over the coming week.