Chairman, Swiss America
David M. Bradshaw
Editor, Real Money Perspectives
Updated August 2011
INTRODUCTION "Gold is as much about investors' state of mind as it is about the status of mines. It is a set of beliefs and a world view as much as it is a shiny, malleable metal." -JON MARKMAN -MSN, 12//05
Investors worldwide are seeking safe havens from economic uncertainties. The commodity super-cycle has swept gold prices up fourfold since 2001. But that's just the kickoff phase, according to scores of gold analysts and experts.
Recent media warnings about gold prices always seem to arrive right on cue: immediately following new nominal price highs. These gold bears said to forget gold at $500, $750, $1,000, $1,200 and now $1,600/oz. They have called gold the new "bubble" at each new level and they have been proven wrong each time.
These relentlessly anti-gold prognosticators always "ignore gold when it is at the bottom," writes economist Gary North. "They ignore it when it has doubled. When it has tripled, they write articles on why it's not a good investment, because it is overbought. When it has quadrupled, they call it a bubble."
Gold, of course, is not immune to price corrections - seven major ones in as many years to be exact - but the secular bull market in precious metals rages on. All investments have risk, including precious metals, but metals have proven to be the best investment of the 21st century in part due of their periodic price consolidations.
For example, after surging above $1,200/oz. in December 2009, gold prices corrected back to $1,060/oz. on February 4th. Since then, prices have steadied near $1,200 as shaky currency and sovereign debt worries threaten to spread worldwide and crush a fragile economic recovery.
Please do not be distracted by media hype over gold's periodic corrections or a purported gold "bubble." Instead, keep your eyes on the facts and focus on fundamentals.
Following each of the last six major corrections, gold prices have risen an average of 36%. While past price movements do not always foretell future movements, we could easily see prices rise above $1,800/oz. in 2011.
YES ...GOLD TODAY REPRESENTS AS GOOD, IF NOT A BETTER VALUE THAN IT DID FIVE YEARS AGO FOR AT LEAST FIVE GOOD REASONS.
1. GOLD: RISK VS. REWARD RATIO
Today's investment world is a much riskier place than it was in 2006. Think back to the 2006-2007 era. The Dow rallied from 10k to a historic 14k peak in the summer of 2007. Confidence in housing was sliding fast and the dollar languished near historic lows vs. the Euro.
We warned our readers in 2007 that, "Dow 14,000 is not a milestone, but rather a mirage concocted of smoke and mirrors. Stocks are priced for perfection -- driven by a weak dollar, low interest rates, credit abuse, mega-mergers and bullishness bordering on madness."
Meanwhile, gold prices took the biggest tumble of the century from $725 in February 2006 to $560/oz. by the Fall of 2006. Virtually every popular pundit in the mainstream financial press said the gold rush was over, "Get out!" But in reality this period of price consolidation would prove to be the quiet before the storms of 2008-2010.
In October 2007 the Dow embarked on its historic 50% slide, from 14k to 7k, finally bottoming out in March 2009.
During this same period gold prices systematically climbed numerous "walls of worry": the housing crash, the popped credit bubble, the great recession, and more with prices touching $850 in 2007, $1,000 in 2008 and $1,200 in 2009-10.
• "The sovereign debt crisis will get worse and bond vigilantes could move on to even bigger economies like the U.S. and Japan when they are done sweeping through vulnerable European nations," said economist Nouriel Roubini. -CNBC.
• "This gargantuan European- and American-taxpayer bailout of bank loans is nothing but morphine to stabilize the patient," according to the International Monetary Fund's Director, Mark Belka. -Newsweek.
• "Analysts expect the precious metal to extend gains to new records over coming days as waves of investor money come flooding into the market looking for safety. Gold prices hit a record $1,248.15 in May 2010 on fears that a $1 trillion European rescue package will not solve the euro zone debt crisis. Risk aversion still dominates market psychology and the fact that gold has moved up alongside the dollar only reinforces investor bias toward the precious metal." -Reuters.
In 2010 the world faces more systemic financial risk than it has ever before in modern history. As Chan Akya described this in the May 22 Asia Times: "Chaos is the new order; a constant state of crisis is the new normal."
This helps explain why today's gold price, in relation to risk, is a better value today than in 2006 at $600/oz.
2. GOLD: FILLS THE CONFIDENCE VOID
"Put not your trust in money, but put your money in trust."
-OLIVER WENDELL HOLMES
The world of 2011 is also much less confident in both government and Wall Street than just four years ago. Placing assets in markets that can drop 900 points in seconds (Flash Crash, 5-6-10) is not really an investment; it is a "bet." In May the financial markets again reminded investors that paper markets rely on confidence to survive, while gold creates confidence.
• "World stocks tumble as debt woes rumble: Sentiment is awful and confidence has been trashed." -AP
• "Mr. Obama is giving Americans a choice of weapons with which to commit economic suicide: debt or taxes." -Washington Times.
Throughout history gold's value has stood tall when the schemes of greedy profiteers and politicians crumble, as they are now. Gold remains what it has been since biblical times: a reliable store of value that government cannot devalue by printing more. No wonder this 21st century gold rush is making headlines daily in 2011.
• "Global conditions today could unleash another gold boom like the one in the 1970s. Then, as now, the world lost confidence in the U.S. dollar as a store of value. Back then, central banks started hoarding gold instead. Today they are net purchasers of gold for the first time since 1988," said Dylan Grice, strategist at SG Securities in London. "And although gold has risen a long way, so has the U.S. money supply. How far would gold rise? To around $6,300 an ounce." -WSJ
• "Gold is the tangible currency of last resort. It is not in a bubble as the fundamentals and market sentiment support the rise in prices. Gold is reflecting exactly what's going on," said trader and senior strategist Adam Klopfenstein of Lind-Waldock in Chicago. -Marketwatch.
• "Investing in the Age of Obamanomics: You only need to know two things about investments: Avoid Wall Street's Recommendations and Invest in Inflation. Not buying gold or silver is one of the dumbest money decisions you can make in 2010. Gold is headed towards at least $2,500 an ounce, and silver is headed for at least $100 an ounce. You will regret for the rest of your life ignoring this epic opportunity!" writes Howard Ruff. -The Ruff Times.
3. GOLD: PRICE REFLECTS FAIR VALUE
"A study of economics usually reveals that the best time to buy anything is last year."
Ideally investors seek to buy at or near market lows with hopes to sell high. However, during long-term secular bull markets lasting 18-25 years, one could argue that we are only two-thirds of the way to reaching a market peak.
On July 18, 2011 gold crossed $1,600/oz., the two-thirds mark toward reaching a new, true inflation-adjusted high of $2,400+ an ounce. Gold, priced in declining paper currencies, is telling the truth about the geopolitical economic realities the world faces and the miserable condition of both Europe and America's fiscal houses.
"The price of gold is up at a record high in all the major currencies, suggesting that out-of-control governments are a worldwide plague. In real terms, using the CPI as the price deflator, the price of gold rose to $682, below the record high of $865 during January 1980," said economist Edward Yardeni to The New York Times (7.25.11).
Mr. Yardeni's "Nominal vs. Real Gold Price" chart illustrates a $1,600/oz. nominal gold price reflects a $900/oz. example of The Inflation Deception. How many Americans would buy gold right now if they knew the 'real price' was $682 an ounce?
• "Despite nearing a 'high,' gold remains a primary safe haven for investors seeking diversification from shaky currencies and global markets. Over the next five to ten years, the likelihood of currency debasement in the United States and Europe is much higher than it has been at any time over the last thirty years. That's the risk that most investors don't have an easy way to offset in their portfolio, and gold is the real direct way to play that," said Jerry Castellini, president of CastleArk Management. -CNBC
Dennis Gartmann, a noted hedge fund manager, called a major top in gold prices at $1,200, telling investors to "rush" to the exits recently. A week later he reversed his position, saying that based on technical factors gold could continue to rise. Sounds pretty double-minded.
Here's the problem: Most financial "experts" are speaking to market traders, not long-term investors. Traders are primarily interested in making a quick buck, while investors should be focused on preserving and protecting wealth against the coming inflation even Gartmann warned about earlier this year.
Bottom line: the advice of short-term speculative traders should not be viewed as good advice for the average, long-term gold holder.
• "Speculators (and investors) are buying gold faster than the world's biggest producers can mine it as analysts forecast a 27% rally that may extend the longest run of annual gains since at least 1920. 'People are afraid of the debasement of all the currencies. What's surprising is that gold is still as low as it is,' said Peter Schiff, president and chief global strategist for Euro Pacific Capital, predicting $5,000 to $10,000 an ounce in the next five to 10 years." -Bloomberg
How much would a passenger have paid to have his or her personal survival lifeboat on the Titanic?
Look around you. The Euro, along with the European community it was supposed to unify, is disintegrating. The average American is sinking in personal debt in an economy with unrelenting double-digit unemployment -underemployment. Meanwhile, the the Federal Government is spending $175,000 every three seconds.
The U.S. government has planned for deficits that could reach $28 trillion within 10 years, a shortfall that inevitably will produce economy-strangling higher taxes and a tsunami of inflation forcing paper money from politicized printing presses.
Can you afford to risk your life savings by putting all your nest eggs in one basket made only of paper dollars whose value can and will be politically manipulated? Or will you safeguard your savings by converting a portion of your assets into the universal solid money politicians cannot devalue? From a long-term perspective, $1,200 gold represents true value in today's world awash in debt, deception and fakery.
4. GOLD: NOW ACCEPTED AS MONEY
"If what is used as a Medium of exchange is fluctuating in Value it is no better than unjust Weights and measures, both are condemned by the laws of GOD and Man."
-ROGER SHERMAN, author of gold and silver coin provision of the U.S. Constitution, wrote a scathing condemnation of paper money entitled "A Caveat Against Injustice"
As the 20th century closed, the advent of paper and electronic money challenged gold's monetary role after thousands of years serving as the world's coined money. Gradually throughout the 1980s and 1990s, gold assumed a new role as a monetary reserve medium, rather than a medium of exchange. This subtle yet powerful monetary shift went mostly unnoticed by the American public.
By 1999, the powerful central banking community which controls all modern money creation began advocating the abandonment of gold as a monetary reserve. Due to a major economic super-cycle change in 2000, this quantum leap toward the total manipulation of the masses into a single, manageable, global, political, social and economic system failed. Instead, substantive, moral-money once again triumphed over symbolic, central banker-created money.
Gold has always been real money, but in the last four years the world has come to understand and believe it. Gold is firmly holding on to its role as the "ultimate currency" with investors worldwide. Most money managers say they would not short the gold market given the levels of debt and uncertainty that exist around the world today.
• "With so much uncertainty out there gold has become a de-facto currency. Gold is currently benefiting from the belief that central banks cannot raise rates. Politically it would be very unpalatable to raise rates raising fears over inflation," said Monica Fan, senior currency product engineer at State Street Global Advisors. -CNBC
• Gold Could Now Face Unlimited Demand: "A German banker once told us that gold normally trades like a commodity. However, when investors lose confidence in currencies, because the pool of gold is so much smaller than the pool of currencies, demand for gold can effectively become unlimited." -BusinessInsider
5. GOLD: HONEST MONEY, COINED FREEDOM
"Gold, like the sun, which melts wax and hardens clay, expands great souls and contracts bad hearts."
-ANTOINE DE RIVAROLI
As the political pendulum swings toward dependency, tyranny and class warfare; gold represents personal and financial independence, peace, prosperity and opportunity.
Money is either the builder or destroyer of society. An honest money system brings prosperity to all citizens willing to work. A dishonest money system enriches a few at the expense of everyone else. Hidden monetary inflation often distorts financial headlines. At Swiss America (www.swissamerica.com) we help our readers debunk today's confusing financial world.
Our original, morally-correct money system was wisely established by our Founding Fathers over 200 years ago. Millions of Americans are discovering that system today as credit, stock and housing market bubbles have popped in the new millennium.
Through it all one asset class has shined the brightest this year and every year since 1999: GOLD. In fact, gold has not only maintained its store of value, it has also increased in buying power over the last half century.
Buying a new home or car today costs 10-20 times more than it did back in the 1950s, with one exception. If instead of holding wealth in dollars (paper IOUs) you owned gold, a new home or car today would actually cost less than it would have in 1954 IF you paid for them in gold coins.
Today's dollar (to many considered immoral money) is in decline, while gold and silver (honest moral money) are inclining. As the U.S. sinks further into unfathomable debt, Americans are finally waking up and converting debt-based money into gold. Gold is one of the only forms of money without counterparty risk.
• "A major change in gold psychology is apparent to the alert observers, and soon to the entire investor community. The gold price has begun to rise despite the dollar holding its ground against very weak alternative currencies. A perverse benefit given the dollar early in 2010 will be seen soon as a loan of goodwill to be paid back in full, amidst the backdrop of alleged Wall Street fraud," reports analyst Jim Willie -GoldIRAs.com
Even outspoken anti-gold voices whose income comes from those who want you to invest in paper, not gold, have begun hedging what they say. One such gold bear, Brett Arends of the Wall Street Journal, last February looked at the government's runaway deficits and warned his readers: "Make sure you are globally diversified and not entirely dependent on the U.S. economy and the dollar," adding that those worried about the dollar should look at having some gold.
In March - a month later, Arends acknowledges, that "the DJIA dropped by 7.9%" - he repeated his usual line that "high-risk" gold's new high dollar price may be a "bubble." But even he admitted "this doesn't feel like the peak of a bubble" and that gold's price may continue to rise, even "to go vertical."
His own chart of recent bubbles shows gold's rise following their same trajectory and implies that if this continues, gold's price may soon double.
This analysis, please note, comes not from a gold bug, but from a gold bear.
Looking ahead to the next decade, the simplest prudent solution for protecting your time, your labor and your family's nest egg is to diversify; to convert a portion (10%-25%) of your assets and retirement savings into precious metals.
Central banks as well as China, India and Russia (reportedly now committed to holding 10 percent of its assets in gold) are increasing their diversification into gold. Learn from what such entities do, not what politicians say.
CONCLUSION: OWN GOLD AT ANY PRICE
Gold has become the investment for all seasons over the last decade. As we look ahead gold's future looks very bright regardless of whether a recovery has indeed begun or the economy dips back into recession. Gold is the world's ultimate money. The key drivers for gold are an unusual mixture of both bad and good news.
The Bad News
• Out of control government spending, deficits, debt, stimulus, etc.
• Global distrust of the dollar, reserve currency status in question.
• Distrust of Wall Street as free markets appear to be in decline.
• Misuse of real estate as a "bubble-proof" asset or personal ATM.
• Declining consumer confidence, higher savings and lower spending.
• More government stimulus to postpone America's day of reckoning.
The Good News
• Political change is now driven by economic and monetary change.
• We see the notion of "too big to fail" coming under increasing fire.
• Town hall meetings and Tea Parties sending a message to stop spending.
• Majority of Americans want less central government, more self-government.
• The economy may be global, but government functions best at local level.
• Transparency and accountability becoming the trend in financial assets and politics.
Historically during an extreme crisis the DJIA has traded at or near parity with the Gold price. These are periods where investors lost confidence in paper assets.For example, in the 1890’s crash the Dow traded at 20 and gold at $20/oz., in 1930’s Dow traded at 40 and $35/oz. gold, then again in 1980’s we Dow 850 and $850/oz. gold. Before the secular bear market in stocks is over some experts say that we could again see Dow-Gold parity. The only question is at what level? 2,000, 3,000, 4,000, 5,000?
Yes, the quiet bull market of the 21st Century has now begun to roar, as we said it would back in 2006-07. Moving little faster than a 19th century stagecoach, this "secular" (long-term) bull market in tangible assets is now finally gaining some notoriety by mainstream America in 2010. This trend may carry gold prices to lofty new levels over the next 5-10 years. Don’t miss the next and perhaps most explosive stage of the gold rush.
Bottom Line: If you don't own any gold, buy it at any price, just like would any type of insurance. We have often surprised clients by saying they should buy gold and hope and pray the price goes down. Why? Because that means the world is becoming a safer place to live and invest in, giving other investments a stable foundation on which to grow.
Gold is the ultimate "just-in-case" asset. It is wealth insurance, and like other kinds of insurance it pays dividends of peace of mind, a reduction in the stress that shortens lives and casts a shadow over life's joys.
Jon Markman of MSN is right: Gold does involve our state of mind.
Gold is the world's plumb line to economic reality ... yesterday, today and forever!
CONTACT Swiss America today at 800-289-2646 to discuss how gold can add value to your portfolio.
NOTE: All news quotes are linked to original stories in May 2010 Real Money Perspectives Archives posted at swissamerica.com Disclaimer: All of the facts and information is believed to be true, however errors are possible. All investments have risk and past performance is no guarantee of future performance.
For further research see 21ST CENTURY GOLD RUSH IS NO BUBBLE!