Best of the Week
Most Popular
1. TESLA! Cathy Wood ARK Funds Bubble BURSTS! - 12th May 21
2.Stock Market Entering Early Summer Correction Trend Forecast - 10th May 21
3.GOLD GDX, HUI Stocks - Will Paradise Turn into a Dystopia? - 11th May 21
4.Crypto Bubble Bursts! Nicehash Suspends Coinbase Withdrawals, Bitcoin, Ethereum Bear Market Begins - 16th May 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.Cathy Wood Ark Invest Funds Bubble BURSTS! ARKK, ARKG, Tesla Entering Severe Bear Market - 13th May 21
7.Stock Market - Should You Be In Cash Right Now? - 17th May 21
8.Gold to Benefit from Mounting US Debt Pile - 14th May 21
9.Coronavius Covid-19 in Italy in August 2019! - 13th May 21
10.How to Invest in HIGH RISK Tech Stocks for 2021 and Beyond - Part 2 of 2 - 18th May 21
Last 7 days
Chasing Value in Unloved by Markets Small Cap Biotech Stocks for the Long-run - 27th Jul 21
Inflation Pressures Persist Despite Biden Propaganda - 27th Jul 21
Gold Investors Wavering - 27th Jul 21
Bogdance - How Binance Scams Futures Traders With Fake Bitcoin Prices to Run Limits and Margin Calls - 27th Jul 21
SPX Going for the Major Stock Market Top? - 27th Jul 21
What Is HND and How It Will Help Your Career Growth? - 27th Jul 21
5 Mobile Apps Day Traders Should Know About - 27th Jul 21
Global Stock Market Investing: Here's the Message of Consumer "Overconfidence" - 25th Jul 21
Gold’s Behavior in Various Parallel Inflation Universes - 25th Jul 21
Indian Delta Variant INFECTED! How infectious, Deadly, Do Vaccines Work? Avoid the PCR Test? - 25th Jul 21
Bitcoin Stock to Flow Model to Infinity and Beyond Price Forecasts - 25th Jul 21
Bitcoin Black Swan - GOOGLE! - 24th Jul 21
Stock Market Stalling Signs? Taking a Look Under the Hood of US Equities - 24th Jul 21
Biden’s Dangerous Inflation Denials - 24th Jul 21
How does CFD trading work - 24th Jul 21
Junior Gold Miners: New Yearly Lows! Will We See a Further Drop? - 23rd Jul 21
Best Forex Strategy for Consistent Profits - 23rd Jul 21
Popular Forex Brokers That You Might Want to Check Out - 22nd Jul 21
Bitcoin Black Swan - Will Crypto Currencies Get Banned? - 22nd Jul 21
Bitcoin Price Enters Stage #4 Excess Phase Peak Breakdown – Where To Next? - 22nd Jul 21
Powell Gave Congress Dovish Signs. Will It Help Gold Price? - 22nd Jul 21
What’s Next For Gold Is Always About The US Dollar - 22nd Jul 21
URGENT! ALL Windows 10 Users Must Do this NOW! Windows Image Backup Before it is Too Late! - 22nd Jul 21
Bitcoin Price CRASH, How to SELL BTC at $40k! Real Analysis vs Shill Coin Pumper's and Clueless Newbs - 21st Jul 21
Emotional Stock Traders React To Recent Market Rotation – Are You Ready For What’s Next? - 21st Jul 21
Killing Driveway Weeds FAST with a Pressure Washer - 8 months Later - Did it work?- Block Paving Weeds - 21st Jul 21
Post-Covid Stimulus Payouts & The US Fed Push Global Investors Deeper Into US Value Bubble - 21st Jul 21
What is Social Trading - 21st Jul 21
Would Transparency Help Crypto? - 21st Jul 21
AI Predicts US Tech Stocks Price Valuations Three Years Ahead (ASVF) - 20th Jul 21
Gold Asks: Has Inflation Already Peaked? - 20th Jul 21
FREE PASS to Analysis and Trend forecasts of 50+ Global Markets by Elliott Wave International - 20th Jul 21
Nissan to Create 1000s of jobs with electric vehicle investment in UK - 20th Jul 21
Bitcoin Halvings Price Forecast and Stock to Flow Analysis - 18th Jul 21
Dell S3220DGF Unboxing and Stand Assembly - 32 Inch 165hz Curved Gaming Monitor Amazon Discount - 18th Jul 21
What Does The Fed Mean By “Transitory Inflation” And Why Is It Important To Understand? - 18th Jul 21
Will the US stock market’s worsening breadth matter? - 18th Jul 21
Bitcoin Halving's Price Projection Forecasts Trend Trajectory - 18th Jul 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

The New Gold Rush

Commodities / Gold and Silver 2011 Jan 05, 2011 - 01:32 AM GMT

By: Nick_Barisheff

Commodities

Best Financial Markets Analysis ArticleAs confidence in global currencies wanes, the world's appetite for gold will increase.

As we embark on 2011, gold continues to climb and investors are questioning its future price direction. Is gold in a bubble? Have the price gains of the last decade-which beat out stocks, bonds and several other favored asset classes- peaked? Did today's investors miss the opportunity to buy?


Since 2002, we have responded to these questions daily, as gold climbed from $275 an ounce to over $1,400. Unfortunately, most people see gold as just another dollar-based asset class to be evaluated using the same metrics as stocks and bonds, and commodities like corn and coffee. But in order to understand the benefits of buying and holding physical gold, investors must go beyond conventional economic wisdom and understand causes rather than symptoms. They need to be able to interpret the message gold is sending.

Gold has its own rules, which explain its price performance and form the foundation of what we call "the gold mindset." This is completely different from the debt-based mindset that has prevailed since 1971, when President Nixon removed the U.S. dollar-the world's reserve currency-from its international peg with gold. Eliminating the gold standard has resulted in anywhere from $14 trillion to $200 trillion of debt for the U.S., which now relies on a phenomenon called "Quantitative Easing" (QE) for economic survival. QE, or money printing, has triggered global currency devaluations and protectionism worries.

In this piece, we will examine four of gold's most important rules; the irreversible trends affecting the gold price; and how the consequences of these trends will push gold higher in 2011 and beyond.

The Golden Rules

Rule 1: Gold is money, not a commodity. Gold trades on the currency desks of the major banks and brokerage houses, not the commodity desks. Central banks have always regarded gold as money, yet many investors today view it as an ordinary commodity, like pork bellies. Because none of the world's currencies are backed by gold, it has become the anti-currency-the money of last resort impervious to Wall Street games, Main Street's over-consumption or QE-happy Keynesians. In 2009, gold officially became money once again when central banks around the world, including those of China, India and Russia, became net buyers for the first time in nearly 20 years. We believe that central banks are preparing for a return to some form of the gold standard.

Rule 2: Gold does not rise: currencies lose purchasing power against gold. Milton Friedman-the renowned American economist-stated: "Nations are not ruined by one act of violence, but gradually and in an almost imperceptible manner, by the depreciating of their circulating currency, through excessive quantity." That is bad news for the U.S., Canada, Britain, the Eurozone and Japan. Their currencies have lost more than 70% of their purchasing power against gold during the past 10 years. When we begin asking: "How many ounces of gold will this cost?" rather than, "How many dollars will this cost?" The shift in perspective is eye-opening.

Gold is a stable economic measure and a reliable standard by which to measure real inflation. Governments manipulate inflation figures to keep the official Consumer Price Index (CPI) artificially low, since the slightest rise can translate into billions of dollars in government-indexed pension payments to the growing number of baby boomer retirees. Today, instead of using a fixed basket of goods that represents a certain standard of living, methods such as substitution, hedonic adjustments (for estimating demand or value) and geometric weighting, are used to understate the CPI.

For instance, John Williams of www.shadowstats.com, calculates the CPI using the original methodology. His figures show that real inflation is already at 8.5% and climbing. Since the CPI has an inverse relationship with Gross Domestic Product (GDP), understating the CPI automatically overstates GDP.

Rule 3: Gold has intrinsic value. Gold has intrinsic value because it is difficult to find, to mine and to refine. In Roman times, an ounce of gold would buy a good suit of clothes; today, the same applies. In his book, "The Golden Constant," Prof. Roy Jastram demonstrated that gold's purchasing power remained remarkably stable between the years of 1560 and 2007.

Rule 4: Gold is a wealth-preserving asset, not a wealth-accumulating asset. We buy and hold gold bullion to preserve wealth. We may speculate in gold stocks, exchange-traded funds, futures and options to increase wealth, but gold bullion ownership best serves the purpose of wealth preservation. This has been the case for thousands of years and will continue to be so unless governments discover a way to produce gold out of thin air, as they do fiat currencies.

Three Irreversible Trends

Since gold appears to be rising because of currency debasement (a term derived from the Roman Empire's practice of hollowing out gold coins and filling them with base metals), we need to consider whether governments will continue to spend and whether inflation will continue to rise. Three irreversible trends indicate that this pattern will persist for years to come. They are the aging population, outsourcing and peak oil.

The world's population is getting older, and most countries offer government-funded social programs designed to help retirees enjoy their golden years. However, an aging population means rising health care costs along with declining tax revenues. This is an unsustainable situation. In Europe, there has been rioting in the streets, as people protest retirement age hikes and cuts to benefits and services.

North American companies now outsource whatever they can with no regard for employees or communities; only the bottom line matters. It is far cheaper to hire someone in China-at 80 cents per hour with no benefits-than it is to hire someone in America-at $20 per hour, plus benefits. Without government protectionism, shareholder pressure ensures that this trend is irreversible. Without jobs, people cannot pay taxes or buy goods.

Finally, we have the serious issue of peak oil, which threatens to destroy the global economy, heavily dependent on cheap fossil fuel. Peak discovery has already occurred and we are fast approaching peak production of reasonably priced oil. Switching over to more expensive oil or to alternative fuels will have a negative impact on global GDP. This irreversible trend will fuel inflation for years to come.

The Consequences

These macro trends will result in:

  • lower GDP
  • systemic unemployment
  • lower tax revenues
  • increased money supply
  • more government debt
  • rising inflation
  • declining currency value
  • and higher gold prices.

Increased government debt and money printing to service the interest on this debt are direct consequences of these three trends. Since 1971, U.S. debt has soared to $13.96 trillion from $776 billion. Boston University economist Laurence Kotlikoff disagrees with that number; he believes true U.S. debt is $200 trillion, or a staggering 840% of GDP.

As investors lose confidence in currencies, the world's appetite for the relatively small amount of available gold will increase. There is an estimated $200 trillion in financial assets worldwide, not including real estate and derivatives. When demand for gold as a safe haven increases, there will be a transition from the $200 trillion financial assets market, to the $3 trillion gold market-much of which is owned by central banks and the world's wealthiest families, and not for sale at any price.

Future: Too Much Money Chasing Too Little Gold

The Chinese government is encouraging its citizens to invest 5% of their savings in bullion. Central banks in China, India and Russia are scrambling to increase reserves. Investment funds and banking institutions globally are turning to gold for insurance. Meanwhile, gold discoveries are down and production costs are rising. Clearly, competition for available gold will become fierce.

Where will the price of gold go?

In 2011, if gold repeats its average five-year increase of 19%, it will climb to $1,785 per ounce. If gold repeats 2010's projected performance in 2011, it could reach $2,010 per ounce. If the U.S. Federal Reserve unleashes more QE, gold's price will be much higher.

Today, gold is telling us that it can protect our wealth as it has successfully done for thousands of years. In such uncertain times, it is comforting to know that bullion ownership allows for sovereignty over personal economic destiny, and can change the way we view and experience economic reality.

By Nick Barisheff

www.bmginc.ca

Nick Barisheff is President and CEO of Bullion Management Group Inc., a bullion investment company that provides investors with a cost-effective, convenient way to purchase and store physical bullion. Widely recognized in North America as a bullion expert, Barisheff is an author, speaker and financial commentator on bullion and current market trends. He is interviewed monthly on Financial Sense Newshour, an investment radio program in USA. For more information on Bullion Management Group Inc. or BMG BullionFund, visit: www.bmginc.ca .

© 2010 Copyright Nick Barisheff - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in