Why Investors Must Own Gold

Includes: DGP, GLD
by: The Unknown Financial Guru

Gold seems to have found its resistance at $1000.00 per ounce. Having breached that level in March 2008, and again in March 2009, the metal seems to be trading in a very similar fashion now as it did last year at this time. So why be bullish on gold?

From Dow Jones Newswire Monday, May 18:

China's gold reserves may serve as backing for the yuan as Beijing promotes its use overseas, said Zheng Lianghao, managing director of the World Gold Council's Far East division, the Shanghai Securities News reported Monday. Zheng, who was speaking at a forum over the weekend, said increasing gold holdings would provide China with a useful hedge as the dollar faced the possibility of depreciation, according to the report. In late April, the official Xinhua News Agency quoted Hu Xiaolian, the head of China's foreign exchange agency, as saying China's gold reserves had risen 454 metric tons since 2003 to 1,054 tons.

From Jim Rogers on CNBC.com, Tuesday, May 20: "I own the Chinese renminbi. It's not that easy to buy and sell the renminbi because it’s a blocked currency. But I own it and every chance I get to get some more renminbi, I do so," Rogers says. "The renminbi is eventually going to be the next reserve currency of the world. Twenty years from now, perhaps fifteen years from now, the Chinese are opening up there currency more and more every month, every year. And that’s going to continue ... who knows how high it will go," Rogers adds.

With China, currently the largest creditor nation in the world, and with a balance of trade surplus to boot, Rogers would rather own the renminbi (also called the yuan) than many other currencies. But he adds that he doesn't understand why China has a blocked currency. Currently, there are restrictions on money leaving or entering the country and as such, the renminbi is not fully convertible. "China has not made many serious mistakes in the past two to three decades but this is one of them. I don't know why they still have a blocked currency. This is not 1979, it’s not even 1999. It's 2009 and China doesn't need to do that any more," Rogers says."

And from RGE Monitor, May 20, 2009:

Gold markets largely ignored China’s surprise revelation that it hadincreased its gold reserves as much of this had already been priced in by speculators. Moreover, China produces its own gold. The increase in China's gold holdings is just a mere drop in the bucket of its total $1.9 trillion in foreign exchange reserves. Gold's share in China's foreign exchange reserves remains much lower than the global average and well below the U.S. share. But China's interest in gold is consistent with its taste for real assets to gradually diversify from its U.S. bond-heavy portfolio. If other central banks followed suit, gold demand could increase sharply.

The long-term outlook for gold on a fundamental basis is strong. China clearly wants to be the next world superpower. Its barely discreet agenda of diversifying away from dollar based reserves and the increasing of its gold holdings to possibly back the Yuan and progressively opening up the currency to the rest of the world is certainly bullish for gold.

From Adrian Ash of BullionVault:

Brazilian president Luiz Inacio "Lula" da Silva meantime travels to China this week, and "the outcome could be quite explosive," says Steven Barrow, also at Standard Bank. Having blamed the global financial crisis on "blue-eyed bankers" at this April's G20 summit, "Lula has already said that he will suggest to China’s leaders that bilateral trade is conducted in local currencies, not the US Dollar," Barrow notes. "There’s no reason why China can’t make such a commitment this week." Bilateral trade between China and Brazil accounts for only a tiny portion of global trade, but "these sorts of actions from Brazil and China could be the start of creeping de-dollarisation of trade and that’s something that could weigh on the dollar in the very long haul," says Barrow – "meaning years, if not decades."

As an integral part of any portfolio, one must own gold. For the longer-term uncertainty regarding the future of the dollar, one must own gold. For the potential inflation resulting from the never before seen manufacturing of currency, one must own gold. And for the potential demand increase as more nations look to back their currencies with real money, one must own gold. If not the physical metal, then the ETF, GLD. For the more adventurous investor, the double-long ETF, DGP. In my next post I'll discuss the technical aspects of gold for the long and short term.

Disclosure: I own both GLD and DGP.