We don’t recommend investing in gold because we’re gold bugs. We do it because gold is the safest way to protect yourself from failing currencies and out-of-control governments… and because it’s the best way to profit from fundamental factors working in your favour. Even if you haven’t yet participated in the run-up of both gold and silver, we are glad you’re ready to take a look at the investment potential of gold.
The question every investor faces in a bull market is: Do I buy now, anticipating prices will continue higher — and chance getting clobbered if a correction arrives? Or do I wait for a pullback and possibly miss out on big gains? There’s risk either way.
Our goal in this guide is to explore the dynamics of the market that affect when to invest in gold, while underscoring the importance of patience and discipline. Investors must remain patient to avoid chasing gold overpaying, and draining their cash. Instead, we recommend that you use temporary price declines to steadily accumulate the best gold prices to make profitable trades.
Looking back after this bull market has finally run its course, we think gold will have amply rewarded those who bought smart, had meaningful exposure, and stayed the course.
Have you ever stopped to ask yourself why, if the economy is as strong as the government claims it is, they’re still printing money in such large quantities and piling on the debt in ever-increasing amounts? This is not the sign of a healthy fiscal and monetary system. And it’s not just the United Kingdom. Consider the following:
> Since mid-2007, we’ve seen over 500 interest-rate cuts around the world.
> 36 countries now have negative real interest rates.
> Over the past five years alone, the US Federal Reserve has created $1.7 trillion new debt as part of its Quantitative Easing (QE) economic stimulus. This is expected to reach $2 trillion by the end of the year.
> As of November 2013, not one G20 country had a balanced budget.
Economic stimulus is, of course, nothing but deceptive code for money printing. While mainstream money types declare that gold is dead and have been selling, the global monetary environment remains tenuous and reinforces the need to buy and hold gold—a rock-solid conclusion.
But if you believe that there will be no repercussions for past excesses; that the Fed and other central banks will be able to navigate a clean exit from unprecedented money creation; that skyrocketing government debts will be paid off without diluting currencies; that politicians will implement real solutions that balance government budgets and force them to live within their means; that the debt ceiling is irrelevant; and that inflation won’t surface whether or not global economies improve—then maybe holding some gold isn’t the right choice…
If you don’t believe these things, then the prudent response is to prepare for the inevitable fallout from monetary disorder, by having meaningful exposure to gold.
We see very few governments taking the kind of action that will actually fix the world’s underlying economic and fiscal problems. The “free lunch” that mainstream commentators seem to believe in—that inflation, for example, won’t result from money printing—will appear very costly indeed when prices start rising. The Fed is in a tight spot: it cannot exit its bond- buying program quickly or easily, because the ramifications are unacceptable to politicians. So the dilution continues, with the fallout put off to another day.
It’s hard to fathom how we’ll escape the dire fiscal and monetary conditions in many of the developed world economies without some serious fallout—and a strong response from gold. Never before has such an enormous monetary experiment taken place on a global scale. If ever there was a need for monetary insurance, it is now. This makes our personal game plan far more important than the carefully crafted machinations of any Fed chief, politician, or government economist.
It is thus imperative that investors have meaningful exposure to gold.
Excessive debt is the root cause of the crisis. And yet we continue to pile it on.
In spite of massive debt loads shouldered by most G20 countries, the deficit spending continues. Think about that for a moment: not one member of the G20 can balance its budget; all are spending more than they have. This can’t be resolved without some pain.
Though some would argue that deficits are necessary to counter periods of slow or negative economic growth, it’s the recent trajectory of debt growth that’s scary—and unsustainable.
Throughout history, debt levels over 90% of GDP are historically linked to significantly elevated levels of inflation. Specifically, when the ratio has met or exceeded 90%, inflation rose to around 6%, vs. the 0.5% to 2.5% range when it was below 90%. History also shows that the link is not simultaneous, yet the emergence of higher inflation has always been an eventuality.
Because the US Federal Reserve continues to pour money into the economy, it’s difficult to say for certain when gold will make a dramatic move. The historical record indicates that a surge in money growth doesn’t impact economic activity until 9-18 months later. Add another 12 months or so for it to show up in consumer price inflation.
In other words, the Federal Reserve is always driving with a loose steering wheel. Most of the experience behind those numbers is with relatively tame ups and downs in the business cycle—not the kind of financial violence we’ve been seeing over the last several years, which adds another variable.
So while pinpointing the exact timing is difficult, what we do know is that there are clear and unavoidable consequences to wildly energetic money creation, including, sooner or later, rampant price inflation.
Are there signals? The primary sign won’t be inflows to ETFs (though they are indicators), or jewellery sales (the ‘70s bull market had nothing to do with bracelets), or even dramatic increases in the sale of physical bullion (we had that in ‘08 and gold was up 4.3%—hardly meteoric).
No, the rise in gold will occur when there is a significant shift in the psychology of the general public.
That shift may already be under way, in spite of what the mainstream media claims. Equity markets are levitating at all time highs, with the Dow Jones expected to hit 17,000 this year and S&P 500 expected to reach 2000 points. The number of people calling for a correction in this 5 year bull market is growing and with the US Fed winding down its quantitative easing, the potential for a 10%+ correction in the 2nd part of this year is a strong possibility.
Increasing geopolitical tensions from the South China Sea, the Middle East and Eastern Europe all have the potential to intensify this year, a development that adds positive support to the geopolitically sensitive yellow metal.
At the same time, dealers continue to report that demand for physical metal is at runaway levels and that they have a hard time keeping up. Central bankers were net sellers of gold as recently as 2009—and are now heavy net buyers, lending strong support to prices. The US Mint and others have frequently suspended sales of their more popular coins, due to overwhelming demand.
And don’t forget Chinese demand. Imports through Hong Kong, along with China’s own production—it does not export any metal—exceed the amount of ounces sold in GLD by roughly double, an astonishing fact that is overlooked by most journalists.
Institutional investors are starting to enter the gold market as well. The University of Texas announced that its endowment fund (the second-largest in the country next to Harvard’s) had taken possession of a billion dollars’ worth of physical gold. JPMorgan now accepts physical gold as collateral. Morgan Stanley reports that its preferred metal exposure is gold. And Deutsche Bank stated in a report, “We see gold as an officially recognized form of money…” We’re convinced these trends are bound to pick up steam.
Before the gold rocket takes off, invest in gold so that you’re positioned ahead of the crowd.
We’ll start with the grand-daddy of them all: gold. Gold is unique for its durability (it doesn’t rust or otherwise corrode), malleability and its ability to conduct both heat and electricity. It has some industrial applications in dentistry and electronics, but we know it principally as a base for jewelry and as a form of currency.
The value of gold is determined by the market 24 hours a day, nearly seven days a week. Gold trades predominantly as a function of sentiment; its price is less affected by the laws of supply and demand. This is because new mine supply is vastly outweighed by the sheer size of above-ground, hoarded gold. To put it simply, when the hoarders feel like selling, the price drops. When they want to buy, new supply is quickly absorbed and the gold prices are driven higher.
Several factors account for an increased desire to hoard the yellow metal:
When banks and money are perceived as unstable and/or political stability is questionable, gold has often been sought as a safe store of value.
When real rates of return in the equity, bond or real estate markets are negative, people regularly flock to gold as an asset that will maintain its value. Since global equity markets are poised for a long overdue correction, gold is seeing an uptake in speculation from those keen to not lose out.
War and political upheaval have always sent people into gold-hoarding mode. An entire lifetime’s worth of savings can be made portable and stored until it needs to be traded for foodstuffs, shelter or safe passage to a less dangerous destination.
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