A Golden Insurance Policy

24. June 2013 by Joachim Goldberg

One did not hear too much muttering about ‘psychological levels’ when the gold price fell below 1000-euro level last week. Often, some commentator or other will draw attention to the fact that a market has breached a major round number, but not this time. Perhaps it was the direction of the price move – from above to below – that discouraged them. For gold-bugs, of course, it would be a somewhat inconvenient to highlight the importance of the recent price drop. Or, perhaps eurozone-based gold investors are just not even interested. I can imagine that many of them never imagined having to convert their gold back into paper money anyway.

If one bought gold purely as a speculative action, it is understandable that an investor would watch wide-eyed as the price tumbled. The dramatic drop in the global holdings of investment gold since the start of the year testifies to the growing disenchantment of the speculative crowd. However, I hear so often from private investors that the main motivation for buying gold at the outset of the crisis was the fear the eurozone would break up, potential hyper-inflation, or perhaps even the collapse of the entire financial system. People bought gold as for the worst-case scenario: if all else failed, one could always use one’s nuggets to buy a loaf of bread. This kind of purchase is not what one usually considers to be an investment, but rather an insurance policy.

For the moment, the feared horror scenario has not unfolded. Despite the unthinkable imposition of defaults, haircuts, and capital controls, the euro is still there; paper money is still in circulation; and consumer price inflation is timid. Had one bought fire insurance and there had been no fire outbreak, one would usually be relieved. Also, one would not be too surprised if insurance premiums fell following a long period without catastrophe. In this case, however, these same retail gold buyers moan and complain about the fallen price for the yellow metal. It seems that the original intention of this ‘investment’ has been forgotten and these gold holders regret not having cancelled their policy when the risk appeared to be at its most elevated.

I have for years subscribed to a genuine fire insurance policy, but I do not necessarily look forward to the day when I will be able to say: ‘it was worth it.’ As in the financial crisis, my home has not reached a point where incendiary risks have been completely eliminated. Would you abandon your fire insurance just because some time has elapsed without any fire outbreak?

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