KMG Gold. While there are many reasons that gold and silver are going to keep moving higher as the fiat currencies trend lower, at our recent Casey Research Summit in Boca Raton, faculty member Mike Maloney pointed out a fact that, while obvious in hindsight, I had never heard mentioned previously.
Namely, that during the last major precious metals bull market in the 1970s, only about 10% of the world could own gold—due to either legal restrictions or a lack of liquid capital.
Today, few countries prohibit gold ownership, and a far higher percentage of the world's population has transitioned out of poverty.
China provides the most germane example, having legalized gold and silver ownership for private citizens in 2004, and through the explosive growth in national GDP that has caused Chinese gold purchases to skyrocket.
Confirming the point, the following is an excerpt from a recent article from The Wall Street Journal:
Chinese investors are snapping up gold bars and coins, buying more than ever before in the first quarter of 2011 and overtaking Indian buyers as the world's biggest purchasers of the metal.
A growing middle-class in China is raising the appetite for gold there.
China's investment demand for gold more than doubled to 90.9 metric tons in the first three months of the year, outpacing India's modest rise to 85.6 tons, the World Gold Council said in its quarterly report on Thursday. China now accounts for 25% of gold investment demand, compared with India's 23%.
The report underscores the rising appetite for gold among the growing middle-class in China. Fears of the country's soaring inflation, as well as a search for new investments, is luring investors to gold, and marketing of the precious metal has also increased in recent months.
"I think people will be surprised by the strength in the Chinese demand, but we think this is a trend that is set to continue," said Eily Ong, an investment research manager at the gold council.
Notoriously active savers, stashing away on the order of 50% of their income, the Chinese are increasingly opting for gold over the renminbi to stash their wealth.
For those wondering just how big a development this is, consider that in 2007, just before investing in gold became "the thing to do," gold demand in India was 61% of the world's total while China's gold demand was only 9%.
In other words, India is no longer the only elephant in the gold vault. And they are not alone—investors around the world are now able, and willing, to buy gold as a way of protecting their wealth from the inevitable decline of the fading fiat currencies.
I still don't think we are out of the woods on a commodities correction, but there are so many black swans floating overhead that literally anything can happen, at any time; thus buying in tranches on pullbacks over the next four to six months still makes a lot of sense.
But in the longer term, gold has almost nowhere to go but up.
KMG Gold. "We need to adopt a new mindset, a gold mindset."
Numerous commentaries in the media, both on television and in print, would have us believe that gold is a bad investment. Headlines warning investors to avoid the yellow metal are commonplace. Examples such as Five reasons not to own gold”, "Gold is in a bubble", "Gold as an investment—think again," "Gold is a bad hedge," "Gold is a pointless rock," and "Why gold is a bad investment" can be found with a simple Google search on gold and investment.
Each of the above points are addressed and debunked in the BMG Special Report, 'Six Biggest Myths About Gold' which readers of this article are strongly encouraged to read and which can be downloaded for free at www.goldmyths.com.
These articles miss the point, because they treat gold as an investment. To fully understand gold's role in an investment portfolio, we need to adopt a new mindset, a gold mindset.
Simply put, gold is not a bad investment, and gold is not a good investment. Gold is not an investment at all—gold is money.
While many people believe gold is an archaic relic that has no role in today's sophisticated, computerized, paper-based monetary system, three facts contradict this popular misconception:
The definition of "investment" is the commitment of money or capital to purchase financial instruments or other assets in order to gain profitable returns in the form of interest, income or appreciation of the value of the investment. Through this transfer of capital, in the expectation of a profit, an investor gives up their capital and puts it at risk. The investor receives a return in dividends or interest as compensation because their capital is at risk; they may get back less than they invested, or they may get back nothing at all.
However, physical gold bullion or physical paper currencies locked in a vault are not invested; they are simply being stored. Since neither is invested, they don't earn interest or dividends, but they don't have any counterparty risk. The major difference between gold and currencies kept in a vault, however, is that gold's purchasing power increases while paper currencies lose purchasing power year after year.
Both gold and currencies can be taken out of the vault with ease, and the proceeds invested by giving them to someone else in return for dividends or interest. An interesting perspective can be gained by calculating whether the proposed investment is likely to return more gold ounces than were originally invested. For example, the 44 ounces of gold required to purchase the Dow in 2000 has now dwindled to fewer than nine ounces. Might as well have left the gold in the vault. Since gold maintains and even increases in purchasing power, there is no need to put it at risk in order to earn a minimal amount of interest or dividends.
Figure 1 illustrates how gold has not only preserved but also increased its purchasing power from 1971, when the gold standard was abandoned, to 2011.
Figure 2 illustrates how all of the major currencies have declined over the last decade when measured by gold ounces.
It is crucial to recognize that physical gold bullion, held directly or on an allocated and insured basis in a vault, is not an investment because it is not someone else's promise of performance or someone else's liability, and as a result has no counterparty risk. All other forms of gold ownership are, in fact, investments. Paper gold certificates, unallocated bullion accounts, ETFs, shares in gold mining companies and futures contracts all have counterparty risk, and are either someone else's promise of performance or liability. They may have their place in a portfolio, but they are all investments. We hold physical gold in a vault, we hold physical currencies in a bank, but we invest in financial assets.
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