GOLD AS INSURANCE – THE LESSON OF BREXIT

by Louis Cammarosano, Smaulgld:

Gold Acts as Portfolio Insurance and Protection Again Human Error.

Last week’s Brexit vote was a known risk. The date for the voting to take Britain out of the European Union was set in late February 2016. Politicians, central bank officials and commentators warned repeatedly that a vote by the British to leave the EU would result in economic uncertainty and disaster. Yet, many investors who listen to and believe in the wisdom of central planners and their acolytes went unprotected into the vote.

On June 23, 2016, a majority of British voters chose to leave the EU. The equity markets crashed globally as soon as it became clear Brexit was a reality. Could anyone honestly claim that the Brexit vote was “unexpected”? Perhaps at best it was improbable, but there was always a substantial probability that Britons might vote to leave the EU.

Thus, a known risk existed and many investors chose to ignore it. Ignoring known risks and not buying available insurance as a hedge against those risks is reckless. Owning some gold would have acted as insurance against a Brexit leave vote. Gold was less expensive before the Brexit vote and cheaper still six months ago – for a reason. Earlier in 2016, risks to the global markets and the Brexit vote were seen as unlikely to have adverse consequences or were just considered too far off to worry about it.

Gold is up 33% against the British Pound in 2016. That is how a gold ‘investor’ or trader might look at it. Put another way, however, the British Pound has lost significant value in 2016. Owning gold in 2016 would have acted as insurance against the decrease in the value of pounds and pound denominated assets. Depending on the size of one’s portfolio and the allocation of gold to it, gold’s gains vs. the pound would have mitigated or entirely eliminated any pound related losses.

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