In the competitive business environment seen in most sectors of the economy, business owners are looking for any competitive edge over rivals and the appetite to try innovative strategies will increase with the sector’s competitiveness. Holding cash reserves in gold bullion is the latest concept that is being considered by everyday business owners.
The idea behind purchasing gold bullion is that its price rises with inflation. For business owners who consistently buy raw commodities to make their products. With rising prices over time, business owners are consistently trying to manage their costs. If gold bullion bars and coins rise in price as the prices of other goods increase then businesses can hedge against future rising prices by holding some of their cash reserves in gold bullion.
Gold is a reliable store of value and has protected the purchasing power of investors for hundreds of years. Gold’s value tends to be less vulnerable to inflation than fiat currencies such as the pound or dollar. Business owners may opt to hold some of their wealth in gold to protect against the eroding effects of inflation over time.
If the business owner’s home currency devalues, this will make any goods purchased from overseas more expensive. It also means that there is a very good chance that domestic consumer prices will rise which causes the business owner to raise prices to compensate for the loss of the purchasing power. Keeping gold bullion reserves is an excellent way of safeguarding a company’s cash reserves from an unforeseen devaluation. As the pound falls, the gold price will rise against the pound, this profit will benefit the business owner.
It is important to ensure that business owners choose the best type of gold for their hedging activities. While historic and attractive-looking gold coins may be appealing, they are not always the best asset to track the gold price. Standard gold bullion bars are the best choice as their value will always align with the gold spot price. A ‘numismatic’ gold coin such as a Guinea will not see its value fluctuate as tightly to the spot gold price as a bar or bullion coin.
Another benefit of holding gold for a small business is its role in assisting them to raise funds. In some lending arrangements, the creditor will insist on some collateral for securing loans or other credit lines. This could allow the business to borrow at lower rates and/or borrow more capital than they would have otherwise been allowed to do. Gold as collateral may be seen more favourably than other types of asset that can be offered to back a loan because of its role as a haven asset. When there is a rise in economic instability or political issues, the gold price usually holds its value much better than other assets such as shares.
For companies that are engaged with imports and exports. Gold bars and coins can serve as a hedge against volatile currency fluctuations. If a business that often purchases goods from the USA holds a large percentage of its reserves in US dollars before a devaluation of the dollar occurs. It will lose hard-earned profit from business activities due to the dollar falling. Swapping dollars for gold bullion reduces the business owner’s exposure to a falling US dollar. As gold bars are so easy to sell, there are no issues with converting these haven assets into cash. Companies such as Auronum offer a very fast buyback service and pay a competitive rate based on the gold spot price.
The main drawback to this strategy is if the gold price falls. Therefore swapping cash for gold bullion bars should be only part of a business’s assets which is sufficient to diversify their reserves in a way that reduces risk rather than increasing it. Indeed, a business owner cannot completely reduce risk when it comes to inflation and currency exchange rates. Still, they can diversify the risks that they are exposed to as well as swap some risks that they are uncomfortable with for risks that they prefer. The obvious solution here is to consider swapping some cash on the company’s books for gold bars. This is because this reduces the risk that the business has to a depreciation in the currency and changes that risk to that of gold price risk exposure. If the business owner is confident that the price of gold will rise then they will duly feel this is a risk worth taking.
Business owners have many risks to manage in their day-to-day operations as well as managing their company’s growth. Some risks can be managed internally but others are completely out of control for a business owner. The sudden collapse of the domestic currency is a key example of a risk that is difficult to foresee and manage. Gold bullion is the choice asset of central banks. Investors and other large financial institutions in reducing their exposure and by extension risk to a falling domestic currency. This, if managed well, could give a small business owner an edge over rival companies if the optimum macroeconomic conditions are seen in the market.