Gold Price Rises When There Is Blood In The Streets

So, the new year or the new decade started with a bang! On January 3rd, 2020, U.S. conducted a drone strike near Baghdad International Airport killing Qasem Soleimani, commander of Iranian Revolutionary Guards’ Quds Forces. Six days after, the tension between the US and Iran continues to rise, threatening a full-blown war between both nations.  

Due to this conflict, oil and gold prices have been increasing drastically. This is expected behavior as the demand for oil increases during the war while uncertainty in the world politics and economy tend to spook investors towards safe-haven asset such as gold. In this post, I’ll share briefly why I believe gold is an important asset when it comes to financial wealth.

Gold, USD, and Other Currencies

Most currencies in the world are valued against the US Dollar (USD). For example, here in Malaysia, the current exchange rate between Malaysian Ringgit (MYR) and USD is around RM4.1 for 1 USD. Both currencies move in the opposite direction as they have an inverse relationship. Whenever USD appreciates, MYR will depreciate.

The same applies to the relationship between USD and gold prices. When the US economy is stable and growing, USD tends to appreciate against the price of gold. When there are uncertainty and volatility in the political and economic front, USD depreciates while gold price appreciates. To illustrate this point, let’s review the below screenshot taken from around 2 PM Malaysia time zone on the 9th Jan 2020

1. The internationally accepted code for gold is XAU
2. The XAU/USD pair tells how many US Dollar are needed to purchase one Gold Ounce

From the above chart, we can observe the below:

1. At the beginning of 3rd Jan, gold buyers require around USD 1,530 to purchase one Gold Ounce.
2. On 8th Jan, at its peak, gold buyers require more, around USD 1,610 to purchase the same amount of one Gold Ounce
3. On 9th Jan, gold buyers require around USD 1,553 to purchase one Gold Ounce (more compared to 3rd Jan but lesser compared to 8th Jan)

As shown above, the number of USD units required to purchase the same amount of one Gold Ounce has increased from 3rd Jan. This simply means USD value has depreciated over the days. Next time, when you hear or read gold price went up or down, try to think of it in the term of currency appreciation or depreciation.    

I must stress the following point; there are many other factors dictating the value of currencies and gold prices. I’m oversimplifying them in this post just to highlight the importance of Gold to your financial wealth.

Worst Case Scenario

My main concern with my own investment is always on the performance of MYR. Every single investment I have in Malaysia (stocks, unit trust, and EPF) are quoted in MYR. Assuming today I have RM1 million worth of wealth (I wish) and the exchange rate to USD is 4.1. In the USD term, the value of my wealth is around USD 244,000 only (RM1,000,000/4.1).

Now let’s assume, MYR depreciates to 5. Then, in USD term, the current value of my wealth has dropped to USD 200,000 (RM1,000,000/5). Just by a depreciating MYR from 4.1 to 5 (around 18% depreciation), my total wealth has decreased by USD44,000.

Not to sound too pessimistic but what if the exchange rate grows higher than 5? In the 90s, the average exchange rate was around 2. In the 2000s, it was around 3 while in the 2010s it is around 4. It’s ever-increasing. I’m not predicting this will happen, I’m just highlighting that it might happen in the future.

USD/MYR chart since 12 Jan 2010.

Now, some of you will say why worry about the conversion if everything purchased was in local currency. Well, here is one example. We import most of our rice (our most common staple food) from Thailand. To settle the import payment, we must first convert MYR to USD and only then to Thai Baht. Remember, MYR is always valued against USD. A depreciating MYR causes inflation.

1. Think of the sudden rise of inflation in Malaysia during the 97/98 ASEAN crisis. It was mainly due to depreciating MYR.
2. Rice is just one of many basic items we import from other countries.

Gold is Insurance, Not Investment

This is where gold comes handy as protection. Assuming, we do own gold and the gold price remains the same as today’s value around USD1,550. When the exchange rate is 4.1, the value of Gold in MYR is RM6,355. When MYR depreciates to 5, then the value of Gold increases to RM7,750. It’s this simple reason why I treat Gold as an insurance and not as an investment.

When it comes to financial investment, the majority speaks of creating and accumulating wealth. Very few speak on how to protect or insure our wealth during a crisis. In my opinion, gold is one of the best insurances one can purchase to protect his/her financial wealth.

See, most of our financial investments tend to rise in value when there are certainties in the market. However, when volatility starts creeping in, then the values of these investment assets can go down drastically, and we are left without any protection. But if we have gold in our investment portfolio, it acts as a hedging instrument. It mitigates any losses occur to the other financial investments.

Buying Gold

Personally, I pay little attention to gold prices. To me, it’s just insurance for my wealth. It’s slightly irrelevant to me if the price goes up or down. I will still accumulate it as a form of protection for my future well being.

Since early last year, I have been purchasing gold via my mobile using the HelloGold application. It is recognized by Bank Negara Malaysia (BNM) and it is Shariah-compliant. (Don’t simply take my word for it. Please do your own due diligence.)

HelloGold offers a unique savings plan known as the SmartSaver Plan. From their site “it is a monthly savings plan for 12 months that helps savers to buy gold every working day at the lowest price”. I find buying gold every working day at the lowest price quite appealing.  

1. I’m not affiliated with HelloGold in any way. I’m just a user of their platform.
2. Besides HelloGold, there are other ways to buy gold. The most common method is purchasing them from the banks.
3. I also have a colleague who has been constantly accumulating gold over the years from Public Gold.
4. Consider buying fine gold with a purity of 99.9 percent. Gold in jewelry form has lesser purity than 99.9 percent.

Gold Asset Allocation

The right portfolio is one that has a good mix of assets, with gold being about 10 percent on the mix.

James Rickards

Well, the next question is how much to buy? In his book “The New Case for Gold”, James Rickards suggested allocating 10% of our investment portfolio into gold. The 10% allocation is subjective, you may decide lower or higher than this value.

For some unknown reason, I decided to stick to 8%. I really can’t remember why. I guess it’s time for me to review my own allocation and increase it to 10% instead. If I’m not mistaken, BNM only owns 1.5% of Gold as part of their reserves. I can understand if some say 10% is a huge allocation but remember it’s a personal preference, depending on how bullish or bearish you are on the future outlook. I know some still reluctant or against the idea of including gold into their portfolio. No right or wrong here.

I’ll end this post with the below questions. How do you feel when the value of your savings or investment increases over time? Good? What if they increase at the expense of bad events such as war or natural disaster? And what if others make money out of your financial predicament?

A very big thanks to my lecturer Dato Manap for highlighting most of the content I’ve shared in this post. He played a huge part in developing my curiosity on the financial system.