I recently reconnected with a longtime friend who is in the process of re-deploying a significant amount of his portfolio into gold and gold-related assets. He's buying some physical gold. He's looking at investing in the only two gold ETFs that actually hold real physical bullion. He's contemplating the purchase of a precious metals fund that will give him exposure across the major gold producers and he's doing a private placement into a junior mining company that is about to release it's initial 43-101 resource estimate and go into production, possibly late this year. He is doing all this because he is convinced too many dollars have been printed or promised and as a result, the dollar is going to continue its decline, and inflation, possibly even hyperinflation, is going to emerge as other countries, and some U.S. states, become insolvent and default.
Click to Play Robert Ian's GoldSeek Radio Commentary Download mp3
This article proclaims with a certainty that might sway someone who is just beginning to look at gold as an investment option, that gold is somehow in a bubble that is destined to pop and lose value in the near future. Let's examine some of the ideas put forth and see if they hold water or are simply the naive, or purposeful ramblings of someone whose intent is to "talk gold down".
Assertion #1: Gold is not trading off fundamentals. An often repeated piece of misinformation is that gold's primary purpose is jewelry and industrial production, and the global economic slowdown has resulted in a decline for both. The truth is, gold's primary purpose is an investment vehicle and a store of wealth. Unlike silver, gold has limited industrial applications. Almost all gold ever mined is still in existence today.
Assertion #2: Gold is a terrible long term investment. Well, that depends how you define long term. It's true, the gold price has been depressed for 2 of the past 4 decades. However, for the past ten years, the gold price has averaged a 17% annual increase. It is the best performing asset of the past decade. And don't forget, in 1971, President Nixon cut the link between gold and the dollar so his administration, and those that followed, could engage in accelerated deficit spending and free themselves from the political and fiscal discipline imposed by gold. And for roughly 6000 years prior to 1971, gold has been a fundamental underpinning of all money, because gold is money.
Assertion #3: Gold has not kept up with inflation. Let me ask you: how can something that has not kept up with inflation be in a bubble? The numbers often cited are gold's 1980 high of just over $850 per ounce and what should be today's inflation adjusted high of $2300-$2500 per ounce. Yes, gold is terribly undervalued. It has a long way to go in price before any credible discussions of a bubble can take place.
Assertion #4: Gold does not produce income or perform like other investments. That's correct, it doesn't. And that's a good thing. Why? Because other investments like bonds all have counter party risk. In other words, they rely upon some else's ability to to pay. And as you can see with countries like Greece, Iceland and soon many others, the ability or promise to pay can disappear overnight. Gold has no counter party risk. It is an end in itself. Gold is not someone else's liability. Gold preserves (and can actually increase) your wealth and purchasing power, because it acts like a dollar magnet as currencies and confidence collapse.
All currencies worldwide are in trouble. As countries like Greece liquidate assets, the first rush to safety will be the "perceived" safety of the dollar and possibly several other paper currencies. However, over the next several years, when the game of musical currencies comes to an end, the last man standing will be gold.
