August 17, 2020 (Investorideas.com Newswire) Warren Buffett, the world's most notorious investor, was not a fan of gold. He famously said "it doesn't do anything but sit there and look at you" when broached on the subject.
That's not how everyone feels though as thousands and thousands of pounds have been piled into gold by global investors. Recently, a seven-year high of around $1,745 was recorded which proves its popularity when it comes to diversifying your investment.
Why? It's simple. Gold is historically established as a currency of last resort. While it doesn't produce, like companies would, it is an established store of value.
Diversification has always been regarded as the safest survival strategy. In the event of a recession, investors fear that gold or similar stores of value will be the only way to protect wealth from global central banks. When faced with a recession, these banks present us with an unprecedented package of low-interest rates and monetary easing. They intend to support economies and fight the recession, but it is bad news for investors who chose not to diversify.
This may be what needs to happen to restart economies destroyed by the pandemic, but increasing money via quantitative easing will cause inflation. This will benefit Governments who have run up huge debts borrowing capital to fight Covid-19. The value of these debts will be inflated away.
Unfortunately, the benefits don't stretch to cover investors. Small businesses and individuals who have put money aside to protect themselves from a situation like this will see a drop in the value of their savings when we see an inflation spike. As ever, there is no guarantee that inflation will lead to permanent growth. Business owners and investors could be facing a stagnant economy and rising prices.
Serious investors understand the risks of holding cash. In most cases, these people will diversify their savings across even riskier assets. Small business owners want to put money aside in case of an emergency and make investments to futureproof their companies. With little knowledge on the financial marketplace, they are the ones most at risk.
We look at equity markets as an example. They currently look priced to perfection after rebounding from the significant sell-offs in March and April. With stocks looking highly-priced we can understand why Buffet, along with many investors, believed gold was a waste of time - or at least should not be your only inflation hedge.
Everyone accepts gold's function as a diversifier and hedge against inflation. However, the majority of businesses still don't invest in bullion. This is because when businesses are in a position where investing is an option they often choose to upgrade equipment or property. In some cases a business owner would distribute profits to shareholders, but most agree that this would be unwise given the amount of risks businesses are about to face.
So, while investing in gold may seem counterintuitive, I believe there is a strong case for more small companies to diversify their holdings this way. Look at my company Quadrant2Design, which designs and manufactures exhibition stands, as an example. In September 2015 we began investing in gold with a £3,000 initial investment. Over five years we have increased our investment to £114,000, yielding a total return of £59,000.
We own the unit that we operate from and have recently upgraded our machinery. Our initial investment in gold has generated a significant return and protected our reserves from the future risk of inflation. We had no idea at the time of investing that gold would be our lifeline in the face of a pandemic.
Like most other companies in our industry, the business has been challenged by Covid-19. In this environment having ample liquidity is key to navigate the crisis to emerge stronger from Covid-19. Looking ahead to a difficult market for the coming year, because of the decision to invest in gold we are well-positioned, regardless of whether inflation takes off without growth.
For a small business looking to preserve capital, it makes sense to be as diversified as possible. With a very real risk of inflation in the coming years, business owners should also consider whether a holding in gold is appropriate for your business.
Alan Jenkins is the founder and CEO of Quadrant2Design, an exhibition stand design and manufacture contractor that operates throughout the United Kingdom and Europe.
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