Gold News

A Tale of Long Run Investing

What properties should a long-term investment have...?

FOUR INVESTORS with jobs outside the investment field are looking at what they should invest in so they can achieve a comfortable retirement. What should they consider when looking ahead? asks Julian Phillips at GoldForecaster.

These four investors have different ages, one with 10 years to retirement, one 20, one 30 and one forty years to go before they can sit on a beach, grey haired, a little portly, next to a surf board, feeling they can now age graciously, comfortable and without fear for their financial future. That's what so many believe the future holds for them. But is that realistic?

Without a shadow of a doubt the thought of living in a paid-off house is the first target. After all in forty years house prices should have risen at least 20 times over their original cost [that's excluding interest payments, which may have reduced that figure to 10 times] At least that was until the 'credit crunch.' But unlike most investments, you have the added benefit of living in that house over that period so you may not consider that so much of a cost as an inevitable overhead.

Without any expertise in the investment world, all such investors feel that they must now consult an investment sage to whom they assign the full responsibility of making money from the money given to them and achieve the desired results. Consequently, these four usually turn to financial advisors for advice so they can start/continue a pension fund targeting their retirement date. 

This is where it gets complicated, because the extent and variety of choices can be mind boggling.  So what should these four do? Well, they have to keep their eyes wide open and focused on their goal. Most investors don't do this. They ask someone else to do it for them.

So many schemes charge substantial fees for operating such funds for you, and they invest in funds or shares that only pay a portion of their profits to investors. Thus there is a tremendous dilution of return on investment before it reaches these four hard workers. So they have to look hard at the structured investment scene to find what they want to achieve their objective.

A look back in history is pertinent here.  Take your home. If it was bought 40 years ago, as we said above it would now cost [ignoring interest and financing cost] a twentieth of the price you would pay for it today. You may well say that the materials used and the land it stands on, are not rarer today than in yesteryear, so why has the price risen? The supply of houses has not reduced to an expanding market, has it? No, what has really happened is that the cost of money has dropped. Take a look at inflation over the period and compound it to today and you see that your average house has not increased in value, but the value of money has dropped.

We all tend to believe that rising prices mean rising value, it's such a comfortable illusion. But it isn't true.  It is true that different investments perform better or worse than others at different times and the nifty investor who buys at the bottom and sells at the top can outperform everybody else. But this character is a bit of a myth too. 

Back at the time of the Wall Street crash in 1929 one investor did do this and sold out just before the crash, whereas his friend didn't sell until the fall was half way through. But then he heard that his friend thought he was so accomplished that he thought the market had hit the bottom when it was half way down and bought in again and was wiped out.

Today, we hear of funds that returned so much last month and so much the month before. These short-term performances are not to be confused with planning investments for the long term pension plan. We even hear of "day-traders" who become investment stars. Often they share the same fate. Even the most accomplished traders succeed with only 52% of their trades and burn out very young.

Our four investors planning for retirement cannot look to the shooting stars of the investment world as a guide. Day traders at home often lose their savings, simply because they are not emotionally suited to the investment world. As one investment sage said, "The real test of greatness for investors is not how they navigated market cycles during that time, but whether they can adapt to historical changes occurring over half a century or longer." This is what our investors for retirement must do. 

The wise investor who keeps his emotional health, plans for the long-term and maximises total return. This means he reaps capital gains and income from investments. 

This demands that we understand the investment seasons. There are long periods when a particular investment climate keeps going, like the huge bull market that lasted from 1985 to 2007, when the future looked so rosy that prices of houses, shares, etc, reached peaks that seemed as though the 'summer' investment climate would last forever. Even the most famous of investors needed the right climate. 

But then a 'credit crunch' appeared that devastated house prices and equity markets and brought on a cold winter investment climate that also looks as though it isn't going to go away either. Before we grasp another investment illusion that isn't true, we have to look at the causes of these 'seasonal' changes. 

Are they in fact seasonal or structural changes? Do they touch the very root of values and confidence? Are they changes that deeply affect the future worth of investments that we are going to rely on?

What do we mean and how can we understand what will happen to investments looking forward? Well, take a look at gold, which 43 years ago stood at $35 an ounce. Today, after falling back from $1,900 an ounce it stands above $1,500 a rise over that time of more than 44 times. It doesn't do anything but sit there. So why is it special? 

It can't be printed, inflated or rejected despite the best efforts to do so over time. Printed money, on the other hand is totally reliant on the confidence the government printing it can inspire. It's rather like the suit that only intelligent people could see. The two tailors that created it sold it to the king, who told his people that if they were intelligent they could see it. So suddenly everybody was intelligent and could see it, until a little boy saw the king and in shocked tones said the king is in the altogether, altogether as naked as the day that he was born. If there was a Cypriot Pound today it would look the same, as naked as the day that it was born.

But gold is accepted all over the world, sought after by central banks as an important reserve asset and sought after by people like our four investors above. Had investors in Cypriot bank deposits invested in gold they would still have it all now! For so many fundamental reasons people all over the world buy gold for the very long term, not least that it is money in bad times. It is liquid in bad times. It is exchangeable all over the world. Enemies trust in it when they don't trust each other. It is said that people don't buy gold to make money, but buy gold because they have money.

But as with houses we have to explode a myth that is common all over the world. The gold price hasn't risen at all. It is the price of money that's fallen!

We all look for the most comfortable state of mind we can find, but sad to say today this requires a lot of blind hope that change won't come. But it has and it will. We can take the road of the man who fell off the fifty-storey building and as he passed the twelfth floor was heard to say, 'so far so good' but that would eliminate our four investor's retirement, or we can take a more realistic approach.

The soundest of approaches to the future and future of investments is to 'extrapolate' what is here today that is forming the future. When we look around, we see a rapidly emerging Asia [in particular China already the world's second largest economy whose currency is going to be one of the main three global reserve currencies] sucking wealth and power out of the West. We see the US economy with a recovery struggling to gain traction after five-and-a-half-years. We see Europe in recession with unemployment at 12% and structural pressures between northern and southern members with interest rates at false lows. The potential for more economic and monetary crises has never been greater.

In the past, the developed world accounted for 80% of the world's cash flow and the undeveloped world 20%. By 2030, the developed world will account for 35% of the world's cash flow and Asia for 65%. By 2030 there will be 3 billion middle class, two-thirds of which will be in Asia.

What is certain is that the changes that lie ahead will cause strains that will destabilise the current status quo and directly affect monetary stability and wealth. In the past gold has withstood these pressures better than any other. And by the past we are talking many thousands of years!

This is the climate our four investors should plan for. The key question they should ask is, "Which investments that will grow in bad times can I add to my portfolio?" Which will last for 10, 20, 30 and 40 years and perform well over that time?

In my opinion [and each reader must make his own mind up], the investment that holds its value as paper money cheapens is the investment to make. Gold has done that throughout history. My personal view is that what we have seen in gold in the last forty years will pale into underperformance in our investor's future. Uncertainty, fear and change are on the way as well as a great deal of stress. The events in Cyprus are not the last of these.

Ayn Rand warned of such actions in her book, "Atlas Shrugged." Here's a snippet that is particularly appropriate today:

"Whenever destroyers appear among men, they start by destroying money, for money is man's protection and the base of a moral existence. Destroyers seize gold and leave to its owners a counterfeit pile of paper. This kills all objective standards and delivers men into the arbitrary power of an arbitrary setter of values."

And to her, gold was the objective value, "an equivalent of wealth produced," as paper is only "a mortgage on wealth that does not exist."

JULIAN PHILLIPS – one half of the highly respected team at – began his career in the financial markets back in 1970, when he left the British Army after serving as an Officer in the Light Infantry in Malaya, Mauritius, and Belfast.

First he worked in Timber Management and then joined the London Stock Exchange, qualifying as a member and specializing from the beginning in currencies, gold and the "Dollar Premium". On moving to South Africa, Julian was appointed a macro-economist for the Electricity Supply Commission – guiding currency decisions on the multi-billion foreign Loan Portfolio – before joining Chase Manhattan and the UK Merchant Bank, Hill Samuel, in Johannesburg.

There he specialized in gold, before moving to Capetown, where he established the Fund Management department of the Board of Executors. Julian returned to the "Gold World" over two years ago, contributing his exceptional experience and insights to Global Watch: The Gold Forecaster.

Legal Notice/Disclaimer: This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. Gold Forecaster/Julian D.W. Phillips have based this document on information obtained from sources they believe to be reliable but which it has not independently verified; they make no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. Expressions of opinion are those of Gold Forecaster/Julian D.W. Phillips only and are subject to change without notice. They assume no warranty, liability or guarantee for the current relevance, correctness or completeness of any information provided within this report and will not be held liable for the consequence of reliance upon any opinion or statement contained herein or any omission. Furthermore, they assume no liability for any direct or indirect loss or damage or, in particular, for lost profit, which you may incur as a result of the use and existence of the information, provided within this report.

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