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Price is determined by demand and supply and, going forward, demand for
gold may continue to rise, while supply will remain constrained as it has since the beginning of time. With this backdrop, let’s explore some specific reasons investors may consider buying gold at today’s prices. Words: 1315
So says Axel Merk (www.merkinvestments.com) in edited excerpts from his original article* posted on his site under the title Worth its Weight: Six Reasons to Buy Gold Today.
Lorimer Wilson, editor of www.FinancialArticleSummariesToday.com (A site for sore eyes and inquisitive minds) and www.munKNEE.com (Your Key to Making Money!), has edited the article below for length and clarity – see Editor’s Note at the bottom of the page. This paragraph must be included in any article re-posting to avoid copyright infringement.
Merk goes on to say, in part:
Reason 1: Hedge Against Inflation
There was a time, until World War I, when gold was money and money was gold, or at least backed by real, physical gold. Then the need to repay war debts induced the involved countries to “print” money. Countries became partially disengaged from the gold standard then, and more disengaged with the onset of the Great Depression and World War II but printing money on a massive scale happened only during these crises.
Today, it seems that the “crisis” is nearly perpetual, and the virtual printing presses run all the time. Virtual? Yes, you don’t even have to print the money any more; it can simply be created with the stroke of a keyboard and it’s become so easy that trillions in new paper “fiat” currency will be created – all to chase the same amount of goods and services.
It may be worth keeping in mind that there is no upper limit to the amount of dollars that can be created, and to the extent that gold (or anything else for that matter) is priced in dollars, there is no upper limit to what the price of gold can be. One estimate calls for $15 trillion to be printed in the next three years worldwide. We are getting ever further away from the gold standard.
Of course, that brings the potential for uncontrollable inflation. That is, unless these central banks can “mop up” the liquidity, withdrawing the cash from the economy, but in doing so, central banks will slow their economies – a politically unpalatable scenario. Add to that the crushing public debt loads, which induce countries to inflate their way out of debt, that is, to allow their currencies to depreciate and pay with cheaper money later, and we have a powerful mixture for future inflation. What happens when there is inflation – or when people anticipate inflation? The price of gold may go up.
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Reason 2: Store of Wealth
Aside from governments and central banks, ordinary citizens of developing nations see gold as the present and future storehouse of wealth. Moreover, they are buying it in increasing quantities as questions loom about their own currencies, and now the currencies of others like the Euro and U.S. dollar.
About 50 percent of world gold consumption is for jewelry, while 40 percent is for investments and 10 percent is for industry. India alone buys some 25 percent of all gold produced each year. That figure is increasing: in 2010 alone the amount of gold bought by Indian citizens increased 69 percent from 2009, and Indian households today control some 11 percent of the total global gold stock. Although demand in India dropped off somewhat in 2011 due to new import taxes, demand is growing in China, Russia and other countries for many of the same reasons.
Reason 3: Central Banks Buying
In part, as an attempt to diversify their holdings and hedge against the inflationary effects of global money printing, central banks, for the first time since the mid 1960s, have become net buyers of gold. From 1965 through 2007, they were net sellers of gold. These banks, particularly in developing countries, want to fill their vaults with something other than paper currency and the ever-riskier bonds of sovereign nations.
Estimates call for central banks to buy some 10 percent of the new supply of gold each year. Countries like Russia and Mexico will actively buy bullion in the world market as well as directly from their domestic producers, keeping that new supply off of the world market.
Reason 4: Protecting Your Purchasing Power
If you look at a long-term chart of the price of gold versus the price of oil, you’ll notice that over time, and given some up and down volatility, gold and oil move pretty much in tandem. Put another way, an ounce of gold buys about 14 barrels of oil, plus or minus – would do so today, and has done so for over 50 years. In the early 1960s, gold was $35 an ounce, and Saudi oil could be had for less than $3 a barrel.
If you, like most of us, need to purchase energy, college education, or health care over time – items that can’t be artificially deflated in price by, say, offshoring to China, investing in gold may allow your purchasing power to keep up with the price of these key goods and services. More people are figuring that out – which only adds to the demand for gold.
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Reason 5: They Ain’t Making More of It
Gold is a commodity. The biggest bugaboo in commodity investing is that demand eventually begets supply. That is, when the price of corn or soybeans or copper rises, what happens? Farmers plant more corn and soybeans, and miners mine more copper, and more copper is recycled – you get the idea. The supply adjustment may take a year or two to unfold, but for most commodities, more supply is around the corner when demand increases. As the saying goes: ‘the cure for high prices is high prices’, in part because those higher prices attract greater supply from the market.
For gold, not so much. Even with the increased worldwide demand for gold as a store of value and an inflation hedge, production has remained relatively flat. Production did double from the 1970s to about 2000 to exceed 80 million ounces per year, but then fell back well below the 80 million mark in the mid 2000s. Only recently in 2011, did production slightly exceed the 2001 peak. Supply growth continues at a 5 percent rate in our assessment – modest in light of some of the demand figures already discussed.
Reason 6: It Pays to Cover the Field
An allocation to gold provides potential portfolio diversification benefits. The more asset classes you invest in, the less chance all of your holdings will fluctuate in tandem.
When considering any investment, you should not only consider the potential positive and negative scenarios for that investment over time, but also the impact on you[r] overall portfolio performance. It is about not putting all of your eggs in one basket…[but] picking the right baskets.
Conclusion
It goes without saying that an investment with a positive expected return is preferred over one with a negative return. With gold, the outlook appears favorable for a number of reasons as outlined above.
Equally important should be how the investment works with the rest of your portfolio; the way the expected return of this asset moves relative to your existing portfolio. This relationship is called correlation. Adding assets whose price movements have a low correlation, or a negative correlation, to your existing assets may help improve your overall portfolio’s performance.
Think back to before the recent financial crisis had taken hold: it was great if you held assets that moved lockstep with one another on the way up but, when the market capitulated in 2008, all those assets likely fell together as well, causing some investors to lose a great deal of value in their portfolios.
The gold price has historically exhibited a low correlation with other asset classes. This fact makes gold a good source of diversification for a portfolio, and gold may help you protect yourself against downside risks. In 2008, when the S&P 500 lost 37% of its value, gold was up nearly 6%.
Holding a variety of assets, including gold, the price movements of which are uncorrelated with one another, may smooth out your portfolio returns over time and help protect against catastrophic losses.
*Source of original article: http://www.merkinvestments.com/downloads/2012-10-11-gold-report.pdf
Editor’s Note: The above post may have been edited ([ ]), abridged (…), and reformatted (including the title, some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. The article’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article.
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