---WHY GOLD---
Why Invest in Gold
Why Holding Gold in Your Portfolio Isn't Advisable... It's a Must
15 Fundamental Reasons to Own Gold
1. Global Currency DebasementThe U.S. dollar is fundamentally and technically very weak and should fall dramatically over the next few years. However, other countries are very reluctant to see their currencies appreciate and are resisting the fall of the U.S. dollar. Thus, we are in the early stages of a massive global currency debasement which will see tangibles, and most particularly gold, rise significantly in price.
2. Rising Investment Demand
When the crowd recognizes what is unfolding, they will seek an alternative to paper currencies and financial assets and this will create an enormous investment demand for gold. Own both the physical metal and select mining shares.
In the space of two years, the federal government budget surplus has been transformed into a yawning deficit, which will persist as far as the eye can see. At the same time, the current account deficit has reached levels, which has portended currency collapse in virtually every other instance in history.
4. Negative Real Interest Rates in Reserve Currency (U.S. Dollar)
To combat the deteriorating financial conditions in the U.S., interest rates have been dropped to rock bottom levels, real interest rates are now negative and, according to statements from the Fed spokesmen, are expected to remain so for some time. There has been a very strong historical relationship between negative real interest rates and stronger gold prices.
5. Dramatic Increases in Money Supply in the US and Other Nations
Authorities are terrified about the prospects for deflation given the unprecedented debt burden at all levels of society in the U.S. Fed Governor Ben Bernanke is on record as saying the Fed has a printing press and will use it to combat deflation if necessary. Other nations are following in the U.S.'s footsteps and global money supply is accelerating. This is very gold friendly.
6. Existence of a Huge and Growing Gap between Mine Supply and Traditional Demand
Mined gold is roughly 2,500 tons per year and traditional demand (jewelry, industrial users, etc.) has exceeded this by a considerable margin for a number of years. Some of this gap has been filled by recycled scrap but central bank gold has been the primary source of above-ground supply.
7. Mine Supply is Anticipated to Decline in the next Three to Four Years.
Even if traditional demand continues to erode due to ongoing worldwide economic weakness, the supply/demand imbalance is expected to persist due to a decline in mine supply. Mine supply will contract in the next several years, irrespective of gold prices, due to a dearth of exploration in the post Bre-X era, a shift away from high grading which was necessary for survival in the sub-economic gold price environment of the past five years and the natural exhaustion of existing mines.
8. Large Short Positions
To fill the gap between mine supply and demand, Central Bank gold has been mobilized primarily through the leasing mechanism, which facilitated producer hedging and financial speculation. Strong evidence suggests that between 10,000 and 16,000 tons (30-50% of all Central Bank gold) is currently in the market. This is owed to the Central Banks by the bullion banks, which are the counter party in the transactions.
9. Low Interest Rates Discourage Hedging
Rates are low and falling. With low rates, there isn't sufficient contango to create higher prices in the out years. Thus there is little incentive to hedge and gold producers are not only not hedging, they are reducing their existing hedge positions, thus removing gold from the market.
10. Rising Gold Prices and Low Interest Rates Discourage Financial Speculation on the Short Side.
When gold prices were continuously falling and financial speculators could access Central Bank gold at a minimal leasing rate (0.5 - 1% per year), sell it and reinvest the proceeds in a high yielding bond or Treasury bill, the trade was viewed as a lay-up. Everyone did it and now there are numerous stale short positions. However, these trades now make no sense with a rising gold price and declining interest rates.
11. The Central Banks are Nearing an Inflection Point when they will be Reluctant to Provide more Gold to the Market.
The Central Banks have supplied too much already via the leasing mechanism. In addition, Far Eastern Central Banks who are accumulating enormous quantities of U.S. Dollars are rumored to be buyers of gold to diversify away from the U.S. Dollar.
12. Gold is Increasing in Popularity
Gold is seen in a much more positive light in countries beginning to come to the forefront on the world scene. Prominent developing countries such as China, India and Russia have been accumulating gold. In fact, China with its 1.3 billion people recently established a National Gold Exchange and relaxed control over the asset. Demand in China is expected to rise sharply and could reach 500 tons in the next few years.
13. Gold as Money is Gaining Credence
Islamic nations are investigating a currency backed by gold (the Gold Dinar), the new President of Argentina proposed, during his campaign, a gold backed peso as an antidote for the financial catastrophe which his country has experienced and Russia is talking about a fully convertible currency with gold backing.
14. Rising Geopolitical Tensions
The deteriorating conditions in the Middle East, the U.S. occupation of Iraq, the nuclear ambitions of North Korea and the growing conflict between the U.S. and China due to China's refusal to allow its currency to appreciate against the U.S. dollar headline the geopolitical issues, which could explode at anytime. A fearful public has a tendency to gravitate towards gold.
15. Limited Size of the Total Gold Market Provides Tremendous Leverage
All the physical gold in existence is worth somewhat more than $1 trillion U.S. Dollars while the value of all the publicly traded gold companies in the world is less than $100 billion US dollars. When the fundamentals ultimately encourage a strong flow of capital towards gold and gold equities, the trillions upon trillions worth of paper money could propel both to unfathomably high levels.
Conclusion
Gold is under-valued, under-owned and under-appreciated. It is most assuredly not well understood by most investors. At the beginning of the 1970's when gold was about to undertake its historic move from $35 to $800 per ounce in the succeeding ten years, the same observations would have been valid. The only difference this time is that the fundamentals for gold are actually better.
P.S. It's simple, really. Demand is soaring. Supplies are plummeting. And if you don't buy gold now, you may not get the chance to later.
A DIFFERENT CLASS OF ASSET:
Most investment portfolios are invested primarily in traditional financial assets such as stocks and bonds. The reason for holding diverse investments is to protect the portfolio against fluctuations in the value of any single asset class.
In building an investment portfolio, investors should avoid unnecessary risk through wise diversification. Diversification is the allocation of investable funds to a variety of investments. By diversifying, investors can reduce the risk that they would otherwise bear. Also, the risk reduction benefits of diversification can be achieved without reducing the overall return on your portfolio.
The Power of Diversification
The key to diversification is finding investments that are not closely correlated with one another. Other things being equal, the less the correlation between two investments, the better suited they are for effective diversification. This gives rise to a problem for most investors because most stocks are relatively closely correlated with one another and most bonds are relatively closely correlated with each other. In addition, there is also a close correlation between stocks and bonds. Investors need to find investments that are not closely correlated to stocks and bonds and include them as additional elements in their portfolios.
Diversification Reduces Risk
Many investors combine tangible assets with their stock and bond portfolios to reduce risk. This is due to the fact that tangible assets have historically had a very low, even negative, correlation with stocks and bonds. This means that they are useful to hold in conjunction with paper investments in order to reduce total risk. Not only is the risk reduced due to negative correlation between tangible and paper assets, but tangible assets have produced exceptional investment returns on their own. Every sign today points to increasing importance for diversification; that also means increasing importance for tangible assets.
* GOLD – STORE OF VALUE
One major reason investors look to gold as an asset class is because it will always maintain an intrinsic value. Gold will not get lost in an accounting scandal or a market collapse. Economist Stephen Harmston of Bannock Consulting had this to say in a 1998 report for the World Gold Council,
“…although the gold price may fluctuate, over the very long run gold has consistently reverted to its historic purchasing power parity against other commodities and intermediate products. Historically, gold has proved to be an effective preserver of wealth. It has also proved to be a safe haven in times of economic and social instability. In a period of a long bull run in equities, with low inflation and relative stability in foreign exchange markets, it is tempting for investors to expect continual high rates of return on investments. It sometimes takes a period of falling stock prices and market turmoil to focus the mind on the fact that it may be important to invest part of one’s portfolio in an asset that will, at least, hold its value.”
Today is the scenario that the World Gold Council report was referring to in 1998.
* GOLD - PORTFOLIO DIVERSIFIER
The most effective way to diversify your portfolio and protect the wealth created in the stock and financial markets is to invest in assets that are negatively correlated with those markets. Gold is the ideal diversifier for a stock portfolio, simply because it is among the most negatively correlated assets to stocks.
Diversification: The Key to Gold Investing
One of the most important aspects of investing is the control of risk in your portfolio, relative to the expected return. Tangible assets are an extremely useful tool for investors in that regard.
Portfolios that contain gold are generally more robust and better able to cope with market uncertainties than those that don’t.
Adding gold to a portfolio introduces an entirely different class of asset. Gold is unusual because it is both a commodity and a monetary asset. It is an ‘effective diversifier’ because its performance tends to move independently of other investments and key economic indicators.
Recent independent studies have shown that traditional diversifiers (such as bonds and alternative assets) often fail during times of market stress or instability. Even a small allocation of gold has been proven to significantly improve the consistency of portfolio performance during both stable and unstable financial periods.
There are six primary reasons why investors own gold:
1. As a hedge against inflation.
2. As a hedge against a declining dollar.
3. As a safe haven in times of geopolitical and financial market instability.
4. As a commodity, based on gold’s supply and demand fundamentals.
5. As a store of value.
6. As a portfolio diversifier.
* HEDGE AGAINST INFLATION
Gold is renowned as a hedge against inflation. The most consistent factor determining the price of gold has been inflation - as inflation goes up, the price of gold goes up along with it. Since the end of World War II, the five years in which U.S. inflation was at its highest were 1946, 1974, 1975, 1979, and 1980. During those five years, the average real return on stocks, as measured by the Dow, was -12.33%; the average real return on gold was 130.4%.
Today, a number of factors are conspiring to create the perfect inflationary storm: extremely stimulative monetary policy, a major tax cut, a long term decline in the dollar, a spike in oil prices, a mammoth trade deficit, and America’s status as the world’s biggest debtor nation. Almost across the board, commodity prices up despite the short-term absence of a weakening dollar which is often viewed as the principal reason for stronger commodity prices.
Oil, Inflation and Gold
Although the prices of gold and oil don’t exactly mirror one another, there is no question that oil prices do affect gold prices. If oil prices rise or fall sharply, investors can expect a corresponding reaction in gold prices, often with a lag. There have been two major upward moves in the price of gold since it was freed to float in 1968. The first occurred between 1972 and 1974 when oil prices climbed 325%, from US$2.44 to US$10.36. During the same period, gold prices rose 268% (on a quarterly average basis) from US$47.45 to US$174.76. The second major price move occurred between 1978 and 1980, when oil prices increased 105%, from US$12.70 to US$26.00. Over the same period, quarterly average gold prices rose 254% from US$178.33 to
US$631.40.
* GOLD - HEDGE AGAINST A DECLINING DOLLAR
Gold is bought and sold in U.S. dollars, so any decline in the value of the dollar causes the price of gold to rise. The U.S. dollar is the world’s reserve currency - the primary medium for international transactions, the principal store of value for savings, the currency in which the worth of commodities and equities are calculated, and the currency primarily held as reserves by the world’s central banks. However, now that it has been stripped of its gold backing international banks and Countries are reviewing there currency reserve options
* GOLD AS A SAFE HAVEN
Despite the fact that the United States is the world’s only remaining superpower, there are a myriad of problems festering around the world, any one of which could erupt with little warning. Gold has often been called the “crisis commodity” because it tends to outperform other investments during periods of world tensions. The very same factors that cause other investments to suffer cause the price of gold to rise. A bad economy can sink poorly run banks. Bad banks can sink an entire economy. And, perhaps most importantly to the rest of the world, the integration of the global economy has made it possible for banking and economic failures to destabilise the world economyAs banking crises occur, the public begins to distrust paper assets and turns to gold for a safe haven.
When all else fails, governments rescue themselves with the printing press, making their currency worth less and gold worth more. Gold has always risen the most when confidence in government is at its lowest.
* GOLD - SUPPLY AND DEMAND
First, demand is out pacing supply across the board. Gold production is declining; Copper production is declining; the production of lead and other metals is declining. It is very difficult to open new mines when the whole process takes about seven years on average, making it hard to address the supply issue quickly. Gold output in South Africa, the world’s largest gold producer, fell to its lowest level since 1931 this past year as the rand’s gains prompted Harmony Gold Mining Co. and rivals to close mines despite 16 year highs in the gold price.
Growing Demand - China, India and Gold India is the largest gold-consuming nation in the world. China, on the other hand, has the fastest-growing economy in modern history. Both India and China are in the process of liberalizing laws relating to the import and sale of gold in ways that will facilitate gold purchases on a mammoth scale.
China is teaching the West something new. Its economy, growing at 9 percent per year, is expected to become the second largest in the world by 2020, behind only the United States. Last year Americans spent $162 billion more on Chinese goods than the Chinese spent on U.S. products. That gap has been growing by more than 25 percent per year. China’s consumer class, meanwhile, is spending on everything from bagels to Bentleys – and will soon outnumber the entire U.S. population. China’s explosive growth “could be the dominant event of this century,” says Stapleton Roy, former U.S. Ambassador to China. “Never before has a country risen as fast as China is doing.”
Source: www.newzealandmint.co.nz/downloads/why_should_you_invest.pdf
Factors Influencing the Gold Price
Supply & Demand
Factors influencing the gold price Today, like all investments and commodities, the price of gold is ultimately driven by supply and demand. Unlike most other commodities, the hoarding and disposal plays a much bigger role in affecting the price, because most of the gold ever mined still exists and is potentially able to come on to the market for the right price. Given the huge quantity of stored gold, compared to the annual production, the price of gold is mainly affected by changes in sentiment, rather than changes in annual production.
Bank Failures
When dollars were fully convertible into gold, both were regarded as money. However, most people preferred to carry around paper banknotes rather than the somewhat heavier and less divisible gold coins. If people feared their bank would fail, a bank run might have been the result. This is what happened in the USA during the Great Depression of the 1930s, leading President Roosevelt to impose a national emergency and to outlaw the ownership of gold by US citizens.
Low or Negative Real Interest Rates
If the return on bonds, equities and real estate is not adequately compensating for risk and inflation then the demand for gold and other alternative investments such as commodities increases. An example of this is the period of Stagflation that occurred during the 1970s and which led to an economic bubble forming in precious metals.
War, Invasion, Looting, Crisis
In times of national crisis, people fear that their assets may be seized and that the currency may become worthless. They see gold as a solid asset which will always buy food or transportation. Thus in times of great uncertainty, particularly when war is feared, the demand for gold rises.
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