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My #1 Reason to Own Gold
Let’s get one thing straight. I may be long and strong gold, but I’m definitely NOT romantic about the yellow metal.What I mean is, some investors fall in love with one investment and refuse to sell it – even when the entire market is working against them.
I would NEVER advise you do that.
Instead, I would recommend working with what the market has to offer at this moment in time.
That brings me back to gold…
I’ve been recommending my readers buy gold since 2002, and I’ve also been buying gold for my own portfolio. I last bought gold at $1,200 an ounce, and I’ll buy more whenever it corrects sharply.
So far, I haven’t been able to convince myself to sell any – even though it’s climbed +500% since 1999. No matter who’s selling gold or which ETFs drive up gold’s price, or even as the dollar strengthens, I’m still drawn to the yellow metal.
Even news that George Soros sold 99% of his gold in May hasn’t shaken my resolve. That’s because I’m an investor, not a trader… and I don’t see any quick fixes in the global exchange rate system.
But again, it’s not because I’m romantic about gold. It’s because the primary trend is still bullish and the fundamentals remain intact.
In short, I see major financial hurricanes heading our way in countries (and even a few currencies) around the globe. Let me explain…
It’s Time to Pay Those Stimulus Bills
By far, the most compelling reason to own gold these days is the explosive price tag of the global credit crisis.
Most investors fail to appreciate just how much cash governments around the world have pumped into their economies to “fix” them.
In many ways, governments have boxed themselves into a corner with all this spending and they will be paying for it for years to come.
We’ve all heard about the sovereign debt problems across the pond. Several European countries – Greece, Portugal, Spain – risk defaulting on their sovereign debt. It’s a huge mark of shame for a nation… almost like filing for bankruptcy.
But this list of possible “sovereign debtors” is not limited to economies in the eurozone. It also includes the U.S. and the U.K.
The only way these countries knew how to survive the financial crisis was to print more money.
Mark my words. A horrible day of financial reckoning will come when all these governments start draining the excess liquidity from their economies.
That day could arrive for the dollar sooner than we think. The Federal Reserve’s second round of Quantitative Easing (QEII) comes to an end this summer.
When that happens, I’m convinced we’ll eventually suffer the worst inflation since the 1970s thanks to four years of unorthodox Federal Reserve monetary operations. It’s going to be pretty interesting to see how the Fed unloads $2.8 trillion-worth of securities from its balance sheet without triggering a major market event or dislocation.
Ongoing monster-sized fiscal imbalances in the U.S. and in other countries around the world will lead to some sort of currency crisis eventually. That crisis will make 2008-2009 look like a cocktail party in comparison.
And during times of crisis, gold tends to rise as the true “safe haven” investment.
On Top of This, Gold’s Demand May Overtake the Supply
Supply and demand dictates the most important reason for owning or avoiding any commodity, including gold. If you don’t understand a commodity’s supply and demand situation, then the odds are you’ll lose on that investment.
What you need to know about gold is that it’s not actually a commodity. It’s a currency. All of the world’s currencies – including the mighty Swiss franc – have declined versus gold since 2005. They’re all losing their purchasing power against gold.
That’s why the yellow metal is in such high demand.
It seems that, despite record high prices, gold buyers still purchased the precious metal in droves last quarter. According to the World Gold Council, gold demand rose 11% to 981.3 metric tons.
In what is becoming a familiar refrain, China was a major reason for the increase in demand. The country’s purchasing rose 47% in the quarter and the W.G.C. believes it may easily double by 2020. The demand for jewelry is one of the main reasons for the strong rise in demand for gold. Jewelry purchases in China increased by 21% in Q1.
It is no surprise then, that when Swiss luxury brand group, Richemont, recently reported earnings they announced a 33% rise in revenue attributed to a surge in demand in Asian countries. The company’s Deputy CEO went so far as to announce, “We are actually facing more demand than we can cope with.”
Accounting for 40% of total global gold demand, China and India are not only buying gold jewelry products from companies such as Richemont simply because they like the look of the shiny metal. Consumers in the two countries recognize the purchase of gold products as an investment with strong growth potential. And it seems like they’re not the only ones.
Another Wildcard for Gold: Central Bank Purchases
Central banks are also jumping on the bandwagon. After more than two decades, central banks have once again become net buyers of gold.
A driving force behind this is the central banks of emerging markets wanting to diversify away from their rapidly increasing holdings of foreign currencies. Another reason is that European central banks are much more reluctant to reduce their gold reserves from their vaults.
For those worried about the current price pullback and volatility in commodities, the World Gold Council points out that gold is able to more easily absorb price shocks not only compared to other commodities but to the stock market as well.
This means that on average, gold’s volatility remains significantly below that of the Goldman Sachs Commodity Index as well as the VIX.
The Next Move to $2,000 Gold and Beyond
The point here is that gold still has a long way to rally.
My projections call for $2,500 to $3,500 an ounce over the next three years, or sooner.
Unfortunately, I see that price coinciding with a financial crisis, brought on by all this government spending. And if it’s not spending then it’s the resultant Circus Act the Fed will have to perform to successfully drain mountains of cash it has created since late 2008.
Something will give…
At that point, I’ll be advising investors to sell gold while everyone else is in panic-buying mode.
Until next time…
Eric Roseman
Editor, Commodity Trend Alert
Blog: http://roseman.sovereignsociety.com/
P.S. Like I said, I still believe gold will go to $2,500… maybe even $3,500. And one of the best ways to gain exposure to this move upwards is with EverBank. It has developed a completely risk-free way to invest in gold – and you gain exposure to four other metals as well. Even better, you don’t risk a dime of your investment capital. You can check it out here.
(Just for transparency sake, we have an advertising relationship with EverBank and therefore may receive fees if you choose to invest in their products.)
Other Posts from the Author
- Hogs on Top in Brutal Market for Commodities - July 12th, 2011
- Europe's Boat Springs another Leak - July 11th, 2011
- Poor Brazilian Crop Threatens Sugar Supplies - July 7th, 2011
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Anyone can buy gold & silver, but where do you sell it without reporting and taking a financial bath from the dealers if you are stuck in the US like many of us are?
Thx,
ok but when everyone starts buying gold or silver, and you must get out and sell? you sell gold for what? US dollars?? i dont think so why would you want to have any paper currency? maybe get hard assets house or property? and some cash hard to say.