Gold and Asset Preservation

The December collapse of the Mexican peso is a good example of how gold protects the wealth of a national currency crisis. The infamous Christmas Surprise started with an anouncement from the Mexican government had devaluated the strength of the peso. The reaction of investors was immediate. Once the announcement of the devaluation was made, long rows of people stood at the banks and sell orders were piled up at brokerage firms, as preocupied investors tried to get their money out of these institutions in time before they went down in a collapse. A financial panic spread into movement, many people were frozen of the equity markets because they had fallen precipitously. The peso was in a continuous state of deterioration.

The inflation rate got up to fifty percent instantly and refused to go down from that level. Interest rates went up incredibly to seventy percent. The people who had credit cards and other sensitive interest debts were hanging on the brink of bankruptcy due to the fact that they couldn’t make the interest payments. During the first year which followed the devaluation, the price of the peso changed from 28.5 U.S. cents to fourteen U.S. cents. During the following years the peso kept deteriorating until now it trades in the ten cent range.

The price of gold on the other hand, changed from a roughly calculated price of one thousand two hundred pesos per ounce to two thousand five-hundred pesos per ounce – a mirror image of the peso’s fall. During 1995, gold was more than three thousand pesos – 2.5 times its starting point, keeping its never changing reputation as the final disaster hedge. Only an appropriate diversification before the fall effectively saved some investors from the crisis in the currency. This is very probably the most important lesson that we can learn and tat is offered to us from the Mexican example: a twenty five to thirty percent portfolio diversification into gold would have recouped almost everything that was lost from the peso and equities markets.

Before the announcement of the devaluation, there was no warning given by the Mexican government or by any of the country’s major financial institutions to the Mexican people. To everyone’s misfortune, none of the citizens had had time to prepare for a financial cutback as this one and none had the possibilities to do anything unless one would have the wisdom of changing their pesos to gold, or to any currency for that matter besides the peso long before the crisis occurred. The word unfortunately is used because if the people weren’t using the facts to foresee the direction that the currency was headed to, they were a little more than a sitting duck when the devaluation hit. In the same form, there is little reason to believe that any further quick or strong deterioration to the American dollar, similar to the one that started in 2002 to 2003, will be mentioned with pride and by the way of warning in the evening news. The same way as it was in Mexico, the idea would be to avoid any such unraveling, or contingent govenrment plans, under cover for as long as possible to avoid an all out currency panic within our country.