I stopped off in Britain this week, en route to an investment conference in Moscow. I want to find out first hand what is going on in the world's cheapest emerging market.
The British are still basking in the afterglow of the London Olympic Games. The gold medals were the largest ever, in terms of weight and diameter – almost twice the size of the medals awarded in Beijing four years ago. But they were hugely debased in value.
This year, the Olympic "gold" medals contain just 1.34% gold. The rest is made up of silver (92.5%) and copper (6.16%). The medals may be prestigious. But their precious metal content is worth just over $500.
There was a time when Olympic gold medals were solid gold. It's typical of our time that the 2012 gold medals are bigger and more "in your face" than ever before. But they are also more debased than ever before.
It's also a reflection of the increasing value of gold when measured against the world's paper currencies. Gold hit a six-month high last month of $1,788 per ounce.
Gold is going to benefit from a further move of real (inflation-adjusted) interest rates into negative territory. There is a long-standing inverse correlation between real interest rates and the price of gold.
The Fed has clearly signaled that it will take its eye off its 2% inflation target and instead target jobs numbers – effectively declaring an open-ended money-printing program.
It is not alone. The Bank of Japan has dramatically upped its own QE program. And although it says it will sterilize any new issuance of paper money, the ECB has announced its own "no ex-ante" bond-buying promise.
This has led Brazil's finance minister to cry foul. He (rightly) claims that this avalanche of new money being emitted by the central banks of the world's developed markets is a de facto "currency war" – what you might call a race to the bottom of the world's paper money.
If history is any guide, QE3 will be supportive of gold. After the Fed announced QE1, the gold price rallied 35% over the next four months. And after QE2, gold rallied 20% over the next 10 months. This suggests that the uplift this time around could be more muted. But the trend higher is still in place.
Alan Greenspan was right. Without gold, there is no way to protect confiscation of savings through inflation.
This is the gold story most investors are (at least dimly) aware of. Even the most dyed-in-the-wool gold skeptic knows that the Fed has the world's biggest printing presses yet no ability to mine gold.
But today, I want to tell you about some of the drivers behind the rising gold price that few investors are aware of – drivers that have little to do with what is going on at policy level in the developed world and more to do with a major shift taking place in the global economy.
But first, let me recap on where we stand with our gold position in the Family Wealth Portfolio.
Asset Allocation Matters
We first recommended you hold a 20% allocation to gold in September 2009. Back then, the gold price was $1,017 per ounce. As I type, it's $1,774 -- a rise of 74.4% over three years.
That works out as a compound return on this simple "beta" play of 20.4% per year. Not bad for something that doesn't pay a dividend or coupon. (Warren Buffett and Charlie Munger can't be too happy about that!)
It hasn't been a straight run. Nothing ever is. Gold started out 2012 at $1,561 per ounce. That's down from its nominal all-time high of $1,919 per ounce in early September 2011. This caused many pundits and investors to speculate on whether this was the start of a "blow-off top" in the metal.
As I reported last August, it's best not to worry too much about price targets when it comes to gold. Gold is a store of real wealth, not a trade. How much gold you own – and when you should buy and sell – should be determined by your strategic asset allocation.