Reasons To Own Gold
1. Gold is rapidly re-establishing its true historic role as money
The true role of gold in society was succinctly summed up in 1912 by the renowned American Financier JP Morgan when he declared that "Gold is money and nothing else." Unfortunately, the U.S. Federal Reserve was created the very next year and as a result of its considerable machinations, Morgan's timeless wisdom is often dismissed for long periods (1980 - 2000 being an obvious example). The immutable reality, however, is that every fiat currency system in world history has ended in ruins. Our current experiment in phony money is unquestionably headed down the same disastrous path, ensuring gold's re-emergence once again as the world's real currency.
2. The inevitability of a collapse in the world's reserve currency, the US Dollar
The US dollar has dominated as the world's reserve currency since the Bretton Woods Accord in 1944 and, as such, anchors the world monetary system. Regrettably, the US has totally abused this privilege and as a result, is undoubtedly fated to lose this status. The US has long since passed "the point of no return" with funded debt now in excess of $15 trillion or 100% of GDP, unfunded liabilities totaling nearly 4x that amount and trillions of off-balance sheet obligations in such bankrupts as Fannie Mae and Freddy Mac. The embarrassing debt limit debate in the summer revealed the polarization in the country and the utter inability to address the intractable federal budget deficit which is now hovering in the area of $1.5 trillion per annum.
3. The US Government can no longer fund its budget deficit in the market and must resort to extensive monetization
The US can no longer count on its citizens, financial institutions and foreign governments to fund its bloated deficit. The Chinese who have been major buyers for years are now openly critical of the US financial scene and are barely participating in new rounds of financing. They are not alone and Russia has been very vocal about actually reducing their exposure. In reality, there are not enough legitimate savings in the system to fund deficits of this magnitude. The Federal Reserve is being forced into the position of funding significant portions of the new debt and this activity, politely called quantitative easing, will only intensify in the future.
4. No other significant currency in the world offers any refuge
The question is no longer whether the Euro offers a legitimate haven but whether it will even survive. Extensive monetization may borrow more time but there is an equally good chance the Euro Zone will dissolve in the near future. In either instance, the outlook for the foreseeable future is dismal. The UK is in such disarray that no further comment is necessary. Japan, which sports the highest government debt to GDP ratio in the industrialized world, is struggling with a persistent 20 year deflation issue and a rapidly aging population. China is seen by many as the world’s next reserve currency but considering the depth of the problems the country is currently wrestling with, that prospect will have to be postponed well into the future. In reality, all the world’s fiat currencies are seriously flawed and will only get worse.
5. The destruction of government balance sheets, the basic insolvency of the banking system and the widespread adoption of quantitative easing and zero-based interest rate policies are collectively laying the foundation for hyperinflation
As the result of the global financial crisis which enveloped the world between late 2007 and early 2009, the world's governments were forced to step in aggressively to bail out their banking systems while also attempting to prop up demand in the private sector. Unfortunately, the inevitable outcome of this was the destruction of the balance sheets of most western governments, a process which is ongoing today. To combat the massive budget deficits, widespread quantitative easing (i.e. unrestrained money creation) was employed. That policy, in conjunction with zero-based interest rates, now appears mandatory to stave off a renewed financial and economic collapse. Historically, the result of these activities has always resulted in the destruction of the currency. In that event, hyperinflation is a very real threat.
6. The ticking derivative time bomb becomes more dangerous with the passage of time
Despite mounting concern about the risks inherent in the whole derivative scene, the amounts outstanding continue to escalate. The Bank of International Settlements has changed the accounting methods to obscure this fact but in the absence of this sleight of hand, the amount outstanding would now comfortably exceed a quadrillion dollars. In reality, the number has to keep growing in an attempt to disguise the losses being hidden on many of the existing derivatives. It would be well to remember that knowledgeable financial insiders have referred to these instruments as "financial weapons of mass destruction." They haven't detonated yet but odds are they will.
7. Investment demand for gold is exploding worldwide as investors begin to recognize that there is no acceptable solution to the world's financial issues
Despite this reality and the fact that gold has been in a robust bull market for eleven years, the demand has been confined largely to sophisticated investors who realize the need to protect their wealth from the ravages of monetary debasement. To date, most conventional institutions and the average citizen has remained largely oblivious to gold's attractions. When the next leg of the global crisis arrives and it is imminent, most financial assets will come under severe downward pressure. This could spark an exponential increase in investment demand for gold.
8. The demand charge is being led by China and India
This is highly significant because not only are these the two most heavily populated nations on earth, they are also progressing rapidly economically and have a deep cultural affinity for gold. India had been the largest consumer but China has moved to the fore, with the government encouraging its citizens to own gold. This has been reflected in sharp increases in Chinese gold imports recently.
9. Growing recognition that many paper gold products do not have the physical gold backing that is alleged
A considerable proportion of the growth in investment demand for gold has been absorbed by a proliferation of new paper gold products. However, it is now becoming apparent to many astute investors that the vast majority of these products are nothing more than a derivation of "fractional banking" and that the gold price is being replicated via the utilization of derivatives and there is in fact very little physical gold backing. This criticism would apply to many gold ETFs, gold pooled accounts and gold certificates. Fortunately, there are some vehicles with fully allocated physical gold backing and the Sprott Physical Gold Trust is one of them. However, as the realization that many gold products aren't what they purport to be sinks in, it should spark a dramatic increase in demand for the real thing.
10. Mine supply is not anticipated to rise appreciably in the foreseeable future
Despite gold prices surging from a low of $252 at the end of the 1990’s to over $1750 recently, mine production has been essentially stagnant during the whole period. This is certainly not unprecedented as mine supply actually fell during the 1970’s when gold rose from $35 per ounce to $850. Much of the high grade, easily accessible gold in the earth’s crust has already been mined and the boom in open pit mining which spurred production in the 1980’s and the 1990’s is rapidly being exhausted. Thus new production will do well just to replace that which is coming to an end. Keith Barron, an individual highly respected in the gold business due to his involvement in one of the world’s last great gold discoveries, Fruta del Norte, in Ecuador almost a decade ago recently stated that world gold production may be on the edge of collapse. That makes the concept of “peak gold” seem optimistic.
11. Central banks have collectively reached an inflection point where they no longer will be in a position to supply the gold necessary to keep the market in equilibrium
12. Accelerating purchases by eastern central banks
The enormous concentration of US dollars in the reserves of many Asian and Mid-Eastern central banks in conjunction with relatively low gold exposure has motivated them to be aggressive acquirers of gold. China and Russia have been increasingly vocal about their intentions, India bought some of the IMF's gold in late 2009 and smaller entities such as Thailand, Mongolia and Kazakhstan have also participated. Their purchases and a lack of western central bank selling have resulted in a situation where central banks collectively will add at least 250 tonnes to their reserves in 2011. This is an enormous change and can only have a salutary impact on the gold price in future years.
13. Increasing skepticism with respect to US gold reserves
The US has long been acknowledged as the world’s largest central bank holder of gold with a reported position of 8,133 tonnes (worth roughly $450 billion). This sounds impressive but, in reality it pales in comparison with the annual US budget deficits comfortably in excess of $1 trillion and funded debt of over $16 trillion. More importantly, there have been recurrent rumors that the US has mobilized a considerable portion of their reserves via various swap and lease arrangements with other nations to aid in the price suppression scheme. These rumors persist because of the absence of an outside audit of these reserves since the Eisenhower presidency and the Fed’s continuing intransigence to allowing one despite repeated requests. In addition, other countries, most notably Germany, have expressed concerns about their gold which is being held at the New York Fed.
14. The continuing existence of large paper short positions in gold
Despite dramatic de-hedging in recent years by the gold producers, whose original excessive hedging was ostensibly the primary reason for the proliferation of gold derivatives, the notional value of OTC gold derivatives still remains elevated. This suggests either a major legitimate bet against the rising secular trend of the gold price (highly unlikely) or ongoing nefarious activity (i.e. price suppression by the usual suspects). The existence of large concentrated short positions on the Comex held by a few large bullion banks almost ensures that it is the latter. If (when) the longs were ever to call for delivery, the shorts' position would be extremely problematic due the intensifying physical shortage of gold.
15. Ongoing gold price suppression has maintained gold's extreme undervaluation despite its price rise to date:
In the face of repeated blather about gold bubbles and forecast of price tops in the mainstream press, gold remains considerably underpriced when measured by any number of metrics (gold price in relation to the staggering amount of money and credit that has been created over past several decades, gold's price relative to any number of other commodities, the gold producer's pathetic returns on capital even in the face of higher prices, etc.) What is particularly revealing is gold's low exposure in portfolios compared to previous peaks. For example, it would have to grow nearly five-fold to reach levels achieved at the end of the 1970's. In addition if gold had merely kept up with the reported rate of US inflation (which is considerably understated) since its previous price peak in 1980, it would presently be trading comfortably in excess of $2300 per oz.
16. The relatively small size of the gold market
In the past, gold's small market footprint has actually been a negative because it more easily facilitated the price suppression activity. This is about to change, however, as gold becomes the asset of choice for more and more investors for all the aforementioned reasons. All the gold mined since the beginning of time is estimated to be worth roughly $9 trillion and the total capitalization of all the world's gold stocks is probably less than that of one US company, Exxon Mobil. When compared to the amount of paper money that could ultimately seek refuge in the world's eternal money, this is little more than a rounding error.
17. Gold is in an established powerful bull market
Gold has just completed the twelfth year of a powerful bull market which has seen twelve consecutive higher yearly closes, a virtually unheard of achievement. However, it remains a stealth bull market because sentiment remains remarkably subdued despite the unrelenting price rise and the ongoing impeccable fundamentals. Unquestionably, gold has been climbing the classic 'wall of worry', a climb made steeper by the stout resistance of the anti-gold cartel and the constant negative propaganda emanating from the mainstream press.
18. Gold has endured
Gold is indestructible, possesses a high value-to-weight ratio (invaluable for storage and transport), is no one else's liability (a major advantage when counterparty risk is everywhere) can be easily concealed and, most importantly, has provided protection against the destruction of wealth for centuries.
CONCLUSION
The fundamentals for gold are unassailable, the long technical picture is excellent and gold remains very inexpensive when compared to almost every other alternative (most particularly, bonds, treasury bills and bank deposits). With currency debasement assured and some form of hyperinflation probable, gold should trade at several multiples of the current price before this bull market reaches its end.
