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Adrian Ash of BullionVault.com outlines the reasons why you should own gold.
You might want to start by asking why anyone would ever want to buy gold in the first place?
After all, gold doesn't pay you an income, and history says gold only really competes with cash-in-the-bank (provided it's safe) or government bonds (provided they pay) when inflation rises faster than interest rates.
Gold bullion rose eight-fold when inflation overtook interest rates in the late 1970s. It doubled in price when the same thing happened again in 2003-2006.
But gold can't compete with stock-market shares either, not when the economy grows and revenues rise. Gold bullion is the most unproductive of assets, and it will never promise you a stake in future profits.
For that very same reason, however, that also means gold bullion doesn't rely on consumer spending, new business investment or clever accountancy tricks for its value. Gold is simply a rare, precious asset that people across the world have used as a store of wealth for more than 5,000 years.
And right now, that simplicity is gold investment's unique appeal.
Buying Gold is as far as you can get from today's complex and exotic debt markets. They're making headlines for all the worst reasons, as banking stocks plunge, mortgage-bonds go into default, and losses pile up at hedge funds. Gold, on the other hand, is recording near three-decade highs, and it still doesn't owe anything to anyone.
In our current financial marketplace, that makes gold bullion rarer still.
Gold bullion's lack of "default risk" also sets it apart from the mountain of debt built up by Western consumers and their governments. The average British household now owes nearly £9,000 (almost $18,000), and that's before you account for their mortgage debt! The US government has run up $9 trillion in debt, much of it owed to fast-growing Asian economies like China and all of it waiting for US taxpayers to make the repayments.
Even in Europe, the single currency Eurozone now faces a housing-debt slump in Ireland, Spain, Italy and Portugal. And compared to this epidemic of debt, very few people own gold. Fewer still Buy Gold Bullion and own it outright, in their name alone.
Six months ago would have been better; Buying Gold in mid-Sept. '07 would now show a near-50% gain against the Dollar, Pound Sterling and Euro.
Buying gold six years ago would have been better still; it has very nearly trebled against the Dollar and Pound since 2002, and it's doubled versus the Euro since 2004 alone. Early gold buyers spotted trouble ahead, and they have been rewarded for taking a risk on this no-income asset.
But very few of these early investors seem to be selling gold just yet. Many respected analysts agree that the real trouble in global finance – against which gold may offer you a defense – has barely begun.
Compare the current "credit crunch" to a major sports event, says Jon Markman for MSN Money, and Satyajit Das – "one of the world's leading experts on credit derivatives, author of a 4,200-page reference work on the subject, among a half-dozen other tomes, and developer and marketer of the exotic instruments himself over the past 30 years" – believes that we're just in the middle of the national anthem before the game even begins.
"It won't end well for the global economy," says Das. If you think that this crisis will get worse before the world's debt problem is cured, then Buying Gold Today could prove a wise decision.
Buying Gold Bullion is not without risks, however. The gold market is very volatile over short-term periods of time, twice as volatile as US stock markets in fact. And even if the bull market starting in early 2000 runs for another seven years from today, you mustn't ignore the chance of a sharp pullback in the meantime.
"Gold rose 600% in the 1970s," as Jim Rogers, world-famous commodities trader and best-selling author of Adventure Capitalist, recently put it.
"Then gold went down nearly every month for two years," he noted, and "most people gave up."
You can't blame investors who quit the gold market between 1975 and 1977. The gold price fell very nearly in half!
But that’s simply "what happens in bull markets," as Jim Rogers says. He adds that between 1977 and 1980 "gold went up another 850%."
Might a severe pullback cut the gold price in half once again? Gold enjoyed a huge surge up to May 2006, rising by $200 per ounce in only six months. For the first time in more than two decades, gold began making headlines at last – and the price promptly slumped by one fifth.
Now gold priced in Dollars, Euros and Pounds has shot higher to a daily run of new all-time record highs. But there's no reason to think a sharp pullback won't happen again. Ask your financial advisor, and he or she should warn you that after six years of solid gains, gold's bull market could perhaps burn itself out. Then they should point to the 1980s and '90s, and show you how gold just kept sinking, year upon year.
Anyone who bought gold in Jan. 1980 suffered a 70% loss over the next 20 years. They still won't be even today. Don't think it can't happen to you, starting today.
Your decision to Buy Gold comes down to weighing up a potential loss in gold against the risks of rising inflation, falling bond prices, a serious failure in the global banking or finance system, and a return of the bear market in stocks and shares. Many serious analysts think the scales are tipped firmly in favor of gold.
Should the golden bull market roll on, however, "the volatility in commodities [will be] problematic for a lot of people to deal with," says Rian Akey at Cole Partners in Chicago, a $120 million fund. "Even if the long-time trend is up, you still have periods where you’re going to be down 10% in a month, and that’s quite difficult for most people."
Accept responsibility for your decision, and it might help you sleep better at night. Ignore the risks before you Buy Gold, and you could find yourself tossing and turning worse than a hedge-fund manager holding a pile of mortgage bonds backed by the very worst subprime debt.
One other tip for judging the size of your Gold Bullion Investment. Many professional advisors recommend somewhere between 5% and 10% of your total available funds, excluding the value of your home. Here at BullionVault, we think that's a pretty blunt tool. Sometimes owning gold will outperform all other asset classes; other times, gold is most definitely NOT what you want to own.
But if you find this 10% rule useful, yet you worry that putting 10 cents in every Dollar of your liquid net worth into gold would keep you awake at night, then cut back your Gold Investing until you start to feel easy. Buying Gold is about defending against risk. Raising your blood pressure by over-investing would be to defeat the object.
How did gold get to its current all-time record highs?
Once upon a time, gold really was money. Indeed, today's monetary system – of paper notes and nickel coins – began when London goldsmiths first gave a receipt to their clients for the gold that they stored in their vaults.
By the late seventeenth century, these receipts began to change hands as a way of making cash payments. Gold in safe-keeping was as good as gold in your hand, and the receipts gave clear proof of gold ownership.
Why spend money moving the gold when all that mattered was the change of ownership?
Today, however, the paper notes and nickel coins we call "money" have no backing in gold. Great Britain and the other major European powers came off the Gold Standard in the 1920s and '30s. Switzerland stopped backing each Franc that it issued with gold in 1936.
Three decades later, the United States finally cut the world's supply of money free from gold when it stopping swapping Dollars for bullion at the Federal Reserve in 1971.
Over the nine years that followed, the price of gold in Dollars rose more than 23 times over.
The world's central bankers finally accepted that killing inflation meant putting the economy in danger with much higher interest rates. The US Fed chairman, Paul Volcker, hiked Dollar interest-rates to almost 20% – and that fantastic rate of return finally put a stop to the great bull market in gold.
The Gold Price sank for the next 20 years, falling lower as the world's monetary system stabilized. Debt, credit and high-growth shares thrived as interest rates were then allowed to slip back. Gold just couldn't compete.
But fast forward to the start of 2003, when world stock markets finally turned higher after the Tech Stock Crash had destroyed half of New York's Nasdaq index, and professional traders who dared to peep through their fingers at the financial markets found two asset-classes already making a strong, solid move higher.
One asset was government bonds, driven higher in price by central bankers the world over slashing interest rates to kick-start the stock market. The other asset – long forgotten – was gold bullion.
Gold bullion investments had risen by 25% against the US Dollar since the Dot Com Bubble peaked in early 2000 – and professional investors just love buying assets that are clearly enjoying a bull market. So along with stocks, bonds and emerging markets, they began to Buy Gold, and to buy gold heavily.
All that cheap money pouring out of central banks in the US and Europe made Gold Investment attractive to mainstream funds for the first time since 1980. Why? Because "people rightly buy gold when they see inflation ahead," as William Rees-Mogg, former editor of the London Times and an advisor to Margaret Thatcher in the early 1980s, said at a private meeting of investors recently.
And a surge in the supply of money, most often led by low interest rates, sits at the heart of every runaway inflation in history.
Gold, the basis of the world's monetary systems until the mid-20th century, cannot be created at will.
Inflation in your cost of living, on the other hand, is all too often the result of runaway growth in the supply of what we've come to call "money" since then.
"Governments are often tempted to answer the cry for more purchasing power by simply creating more money," as Jerry L.Jordan – a central banker – wrote in a recent issue of the Federal Reserve Bank of St.Louis Review.
"But in so doing, the opposite effect is achieved – the purchasing power of money is actually reduced. The result is inflation: a rise in the number of Dollars required to purchase a given standard of living."
Here in 2008, soaring demand from China, India and the other fast-growing economies of Asia is pushing crude oil and world food prices higher. The supply of money in the major Western economies is also rising sharply. Many serious economists believe this is much more than coincidence. The rising Gold Price would seem to support this view.
In the United Kingdom, the outstanding total of notes, coins, bank deposits and short-term loans has exploded over the last five years. It's growing by more than 13% annually in 2007. Inflation in the cost of living, meanwhile, recently hit a 15-year high.
In Europe's so-called "Eurozone", home to the single currency Euro that's now trading at an all-time high against the Dollar, money supply growth is running at three times the pace agreed and publicly targeted by the European Central Bank.
In fact, it's "close to 14% annually" – a near three-decade record – says Paul Vreymans at the Brussels think tank, Work For All. The Gold Price in Euros, meanwhile, has jumped by one third from this time last year.
Over in the United States, the Federal Reserve actually ceased publication of its broadest US money supply data – known as "M3" – at the start of 2006. The Fed said that "the costs of collecting the underlying data and publishing M3 outweigh the benefits" to its monetary policy team. Whatever the truth of that, however, estimates published by private researchers since then now put the annual growth rate at nearly 14% – the fastest rate of expansion in the US money supply since the early 1970s.
Don't mistake today's flood of money for an increase in wealth. Raising the quantity of money threatens to demean its quality. Unless the supply of goods and services rises at the same rate, then the more money there is in the world, the less each individual unit of money you own will buy.
Gold, on the other hand, cannot be created at will. Mining it remains a dirty, expensive and difficult business today – and it's becoming ever harder to find new deposits below ground.
Indeed, the world supply of gold has grown by barely 1.6% per year since the mid-1990s. Annual output in South Africa, the world's biggest gold mining nation, has more than halved in the last decade.
Nor is gold merely a promise of payment – quite unlike all those mortgage-backed bonds, futures contracts and the alphabet soup of CDOs and CDS traded on Wall Street today. It's simply a precious metal that people across the world have used to store wealth for more than 5,000 years.
Why is gold the ultimate store of wealth? In the earth's crust gold is six times rarer than platinum and 18 times rarer than silver. Very nearly impossible to destroy, gold is also very heavy – 75% heavier than lead, in fact. One cubic metre of gold weighs 19.3 tonnes.
So all the gold ever mined, estimated at 150,000 tonnes, would fit into a cube less than 20 metres on each side. It's growing by just 12 centimetres per year, but it still wouldn't even cover a tennis court.
Now compare that cube of gold to the mountain of debt built up by Western consumers, governments and financial traders over the last decade. The rarity of gold really sets it apart – and even after six years of rising prices, Gold Bullion Investment remains a very select decision.
South African mining companies – hit by nationwide power shortages caused by the surging price of coal worldwide – are now looking to dig down 4 kilometres to extend the life of their largest mines. The costs and dangers are only likely to support Gold Prices going forward.
As for new discoveries, the "easy" gold in North America and Australia has pretty much gone. Today's biggest exploration projects are in Central Asia and South America. But gold miners in those countries face "other, less tangible obstacles," as the highly respected Virtual Metals consultancy noted recently, "such as a resurgence of resource nationalist politics and a long-standing (and well-deserved) reputation for corruption at all government levels."
The supply of gold coming from the Western world's central banks also looks set to slow. They accumulated huge reserves of gold bullion at the end of the 19th century, back when gold really was money and every banknote or coin in circulation had to be backed by a quantity of gold held in the government's vaults.
Now, under an agreement first signed in 1999 – just after Gordon Brown famously dumped one-half of the UK's gold reserves at rock-bottom prices – the European central banks have agreed to cap their gold sales each year.
But the supply they add to the gold market is likely to slow even further, because Gold Bullion is the only sure means of payment in times of extreme crisis such as war. Any central bank that empties its gold vault entirely would be putting its population at huge political risk.
If gold sales are slowing, who's buying it right now? India remains the world's hungriest gold market, snapping up one ounce in every five sold worldwide in 2007.
The autumn festival and wedding seasons see jewelry and investment demand peak around Diwali in late October, but Akshaya Thrithiya in late April also sucks a huge quantity of gold off the international market. Between Jan. and April 2007, Indian gold demand rose by 50% from a year earlier.
Gold demand is also surging in the world's other emerging economies, too. Turkey has seen gold sales rise by 25% from last year; the United Arab Emirates grew gold sales by 26% in Aug. 2007 alone. China's gold demand has now risen by one-fifth from 2006.
Then there's the new gold demand coming from concerned investors in the Western world. More crucially, people who don't see themselves as "investors" but rather as "savers" instead are also looking to Gold Invesment as a rare, secure and tangible store of wealth.
Perhaps you're one of them – someone who just wants to provide for the future by saving their wealth, and protecting it, today.
If so, you might like to visit BullionVault and claim a gram of professional-grade gold – with our compliments – by clicking on the link below.
Stored securely in a professional gold bullion vault, your gold will be as safe – physically – as it can possibly be anywhere on earth. As for its future price, BullionVault offers no guarantees. This historic bull market in gold, created by a grinding erosion of the value of money, may all be over tomorrow.
Somehow, however, we don't think so. And you?
Adrian Ash for BullionVault.com September 2007
