10 Reasons Why Gold Has Further to Run

There are a great many factors - economic, fiscal policy-wise, geo-political - which determine which way gold will go. Many analysts have said that we are currently in the midst of the ‘Perfect Storm’ for gold fundamentals. While some may consider this rosy glasses positioning, I do not think it is far from the truth, as the fundamentals for this asset class still point to growth.

1) Global Demand vs Supply

For many years, the global demand for gold has exceeded what has been produced by the worlds mines. In fact, mine production has actually declined in the last ten years. With a world demand often exceeding 5000 tons per year, and a global mine output of a bit over 2500 tons, any sane person would conclude that the price of gold should be going up. Indeed it has, but it has much further to go. Canada has indicated it has already passed its ‘peak gold’ point. Add to this that poorly run power infrastructure in African countries that have been some of the worlds largest producers have caused complete shutdowns of the gold mining industry there, and this only becomes a more compelling argument. What would happen to the price of oil, for example, if OPEC stopped shipping crude?

2) Central Banks Have Acted in Unison to Suppress the Price of Gold

It has been well documented that Central Banks have worked together to sell gold into the market from their reserves, a term known as ‘dis-hoarding’, in order to ‘manage’ the gold price. Ultimately, this has to end, because the Central Banks will eventually either run out of gold, or get to the point where they realize that it is no longer smart to do so. The primary reason Central Banks would have any incentive to do this of course if that if Gold remained a ‘non-money’ in peoples minds, then there would be no reason to stop the current out of control trainwreck that printing endless amounts of money has created.

3) Central Banks are Starting to Reverse Course

Central banks in growing economies around the world are starting to buy, instead of sell, gold. Banks participating in this non-sense have mostly been American, European, and ‘Western World’ entities. Asian banks, such as China and Singapore however, are more than happy to buy up gold and create stronger reserves. Russia has also stepped up its demand, with announced intentions of weighting their reserves to 10% of their treasury. This trend is destined to continue, as more and more countries come to the realization that you cannot ‘Print’ your way to wealth, at least not over the long term. The newly-emerging Asian economies are sitting on reserves of about $6.6 Trillion, and a small shift in their portfolios to gold would send prices through the stratosphere.

4) Sovereign Wealth Funds

These behemoths of financial investing entities have sprung up all around the world, from China to the United Arab Emirates.. They are the greatest monstrosity in wealth management history has ever seen. Their sole purpose: to take massive stockpiles of US dollars and buy tangible assets that are not depreciating, so that the owners of these funds are able to diversify their holdings before dollars reach their absolute intrinsic value (which is zero).

5) Inflation Adjusted Value

Many feel that because gold has topped the 1980 market high of $850.00 per ounce that we are due for a correction, and that the price of gold per ounce will once again travel back down to the $250.00 range. What these fine gentlemen have failed to point out, is that if you adjusted for inflation (that is, the fact that the dollar buys less every year in real goods than it did the year before), then gold would have to be priced at over $2200.00 per ounce to even match the last high in 1980.

6) Gold is Real Money - Always Has Been, Always Will Be

Gold has been money for over 5000 years of recorded history. The idea of paper money is not new, and in fact each time it has been tried (when not backed by gold), it has inevitably over–inflated, crashed, and forced a return to gold as money. Why do humans always go back to gold? Because you can’t create it out of thin air. Gold retains the one key attribute of money that is required in order to maintain value and store wealth, and that is it must be rare. If dollars were as common as rocks lying on the ground, they wouldn’t be worth much, now would they? As they become more and more common, they lose more and more value. The world is starting to figure this out, and this is why you see so many people investing in gold now. It has only just begun.

7) Very Few People Actually Own Gold

Some may think, with all the attention gold has been getting in media lately, that everyone must already be in, and the opportunity is past. I beg to differ. Very few people own gold as an investment today. In fact, I challenge you to go out and do some of your own research. Go out and ask 20 people if they own gold as an investment. I think you will be shocked to see how few do. Now multiply that across the entire population, and you will see why there is such incredible opportunity now.

8) The Ongoing Collapse of the US Financial System

Few people truly realize the situation that our banking system is currently facing. The write-downs that have still not been released in regards to losses in mortgage backed securities have still not been reported. Some analysts estimate we have only seen 25% of the true damage already reported, and with what has been reported alone Citigroup, Countrywide, Bank of America, and Merrill Lynch, Morgan Stanley have all been hemoraging share price as if this were the Great Depression. The shoes keep dropping, and we have a good ways to go before its all over.

9) The Subprime Crisis Didn’t Go Away, It Just Changed Its Costume

The entire fiasco we witnessed with the ‘Subprime Crisis’ has given the stage to other things, yet what we aren’t being told by the press is that is has simply morphed and changed forms. The impact of subprime, is that people cannot go out and re-fi their house and pay off those home equity lines of credit they were using to buy those shiny new cars, boats, barbeques, and wide-screen LCD TVs. Instead, people have turned to credit cards, and that will be the next credit implosion. We have seen record numbers of foreclosures, vehicle reposessions, and credit card failures to pay, and the numbers keep increasing. As this happens in the midst of food and gas prices soaring, we will see the economy come to a grinding halt.

As we have seen from previous behavior, the Fed’s answer to this problem is simply to create more money. Unfortunately, the effect of this is to further destroy the dollar of the value, which in turn compounds all of the items noted above, and creates even greater demand for ‘Real Money’, also known as gold.

10) There is Less Gold per Capita Now Than at Any Other Time in History

All through history, one could take a snapshot of the number of people on the earth, and the number of ounces of gold above ground, and the ratio would have been roughly 1 ounce of gold, for 1 person on the planet. In recent times, this ratio has drastically changed, and today there are 6.5 billion people on the earth, and less than 4.5 billion ounces of gold ‘above ground’. This makes gold today more rare than at any other point in time. To give you an idea of the value of gold, in ancient times, you could buy a mans life, for life, for one ounce of gold. It is obvious that by todays standards, the pendulum could certainly swing a long ways back.

Comments

[J in N Idaho]

I find it comical that Bernancke and Bush meet up this week. I am sure Bernancke tells Bush the real truth, especially about inflation. Bush finally hears that people are going to stop spending money on fuel, and start walking. Immediately, we see commodities sink. Oil takes a huge dive. Gold and Silver do the same. They finally found the top end of what people were willing to pay for fuel. Funny how the price decline in oil still hasn't translated to lower pump prices. However, whe oil goes up, pump prices mirror it right away.

I believe Gold will rebound. To drop 70 to 80 dollars either means one of two things: everyone had an automatic sale in place which created a domino affect. However, everytime gold's price moves $0.90-1.00, it means about 1 Billion of actual gold sales took place. This drop in gold price means about $650B of Gold just got sold. I wouldn't be surprised to learn that Dick Cheney and Company just sold their gold stash and that Bush and Company just sold their Oil Stash.

We all know that the drop on interest rates isn't helping the consumer get lower priced mortgage rates. Banks are keeping the spread. We need a new target rate for those using a SS#. Somehow the individual needs to get the benefit. If we had a different rate for those using a business Tax ID#, then there might be a way to get our individuals excited about purchasing homes again. As it now stands, home prices have been lowered to the point where the owner has no equity when they sell. The rates, and down payment requirements have the buyer at his maximum. The gulf inbetween can only be alleviated by lowering the rate, offering, or having the bank accept a short sale. What's it going to be? Short sales aren't getting much press. Rate drops aren't getting to the buyer. Bernancke's trying. Banks are being greedy. Pass over the interest rate you greedy banks. Let that ball out of the corner. Once we see movement, raise the rates.....but, much slower this time. When 2005 peaked, and rates started to climb, that's when all broke down. Give people time to adjust. 1 Point a year max on the upside.

[kkin365]

Actually, there is only one reason (#8). All others are variations of this basic theme.

[User 149845]

China is now the first gold producer in the world after South Africa.

As for oil, the prices listed by the medias are usually the prices of futures contract.
The real prices paid by the oil companies are in fact much lower.

[Mike Stathis]

Nice article. I might have added 2 more reasons:

1) Gold also serves as a hedge during a crisis

2) The Gold-DJIA ratio

3)

[Jake2]

Long-winded article adding almost nothing new to the argument. The tale and the telling is in the tape, which is down at the moment.

[Thelasko]

"For many years, the global demand for gold has exceeded what has been produced by the worlds mines." This goes for everything in a free market. The price reflects the discrepancy between supply and demand. If anything, this argument suggests that gold is overvalued since the prior price reflected it's inherent usefulness. Gold doesn't corrode and is an excellent conductor of heat and electricity. Other than that, it simply isn't that useful. It's far too soft to be used structurally. It's inherent value is far below today's price. I say, short gold for a big return.

[Jayesh Patel]

Good article & coverage for gold's position.

[marxbites]

Gold or Government Paper

Throughout history, two commodities have been able to outcompete all other goods and be chosen on the market as money; two precious metals, gold and silver (with copper coming in when one of the other precious metals was not available). Gold and silver abounded in what we can call "moneyable" qualities, qualities that rendered them superior to all other commodities. They are in rare enough supply that their value will be stable, and of high value per unit weight; hence pieces of gold or silver will be easily portable, and usable in day-to-day transactions; they are rare enough too, so that there is little likelihood of sudden discoveries or increases in supply. They are durable so that they can last virtually forever, and so they provide a sage "store of value" for the future. And gold and silver are divisible, so that they can be divided into small pieces without losing their value; unlike diamonds, for example, they are homogeneous, so that one ounce of gold will be of equal value to any other.

The universal and ancient use of gold and silver as moneys was pointed out by the first great monetary theorist, the eminent fourteenth-century French scholastic Jean Buridan, and then in all discussions of money down to money and banking textbooks until the Western governments abolished the gold standard in the early 1930s. Franklin D. Roosevelt joined in this deed by taking the United States off gold in 1933.

There is no aspect of the free-market economy that has suffered more scorn and contempt from "modern" economists, whether frankly statist Keynesians or allegedly "free market" Chicagoites, than has gold. Gold, not long ago hailed as the basic staple and groundwork of any sound monetary system, is now regularly denounced as a "fetish" or, as in the case of Keynes, as a "barbarous relic." Well, gold is indeed a "relic" of barbarism in one sense; no "barbarian" worth his salt would ever have accepted the phony paper and bank credit that we modern sophisticates have been bamboozled into using as money.

Continue this excellent article by America's greatest if unsung hero of historical truth and liberty, Murray N Rothbard, at the Ludwing von Mises Institute, at mises.org, my heros all of them!

www.mises.org/rothbard...

And then see what Greenspam himself has said about real money as statism & tyranny's primary impediment, before the last defense of arms, I'd suppose - and please share these around - BTW I'll be writing in Ron Paul, the ONLY honest politician in my 55yr lifetime, no matter what:

GOLD AND ECONOMIC FREEDOM

An almost hysterical antagonism toward the gold standard is one issue which unites statists of all persuasions. They seem to sense-perhaps more clearly and subtly than many consistent defenders of laissez-faire -- that gold and economic freedom are inseparable, that the gold standard is an instrument of laissez-faire and that each implies and requires the other.

In order to understand the source of their antagonism, it is necessary first to understand the specific role of gold in a free society.

Money is the common denominator of all economic transactions. It is that commodity which serves as a medium of exchange, is universally acceptable to all participants in an exchange economy as payment for their goods or services, and can, therefore, be used as a standard of market value and as a store of value, i.e., as a means of saving.

The existence of such a commodity is a precondition of a division of labor economy. If men did not have some commodity of objective value which was generally acceptable as money, they would have to resort to primitive barter or be forced to live on self-sufficient farms and forgo the inestimable advantages of specialization. If men had no means to store value, i.e., to save, neither long-range planning nor exchange would be possible.

What medium of exchange will be acceptable to all participants in an economy is not determined arbitrarily. First, the medium of exchange should be durable. In a primitive society of meager wealth, wheat might be sufficiently durable to serve as a medium, since all exchanges would occur only during and immediately after the harvest, leaving no value-surplus to store. But where store-of-value considerations are important, as they are in richer, more civilized societies, the medium of exchange must be a durable commodity, usually a metal. A metal is generally chosen because it is homogeneous and divisible: every unit is the same as every other and it can be blended or formed in any quantity. Precious jewels, for example, are neither homogeneous nor divisible. More important, the commodity chosen as a medium must be a luxury. Human desires for luxuries are unlimited and, therefore, luxury goods are always in demand and will always be acceptable. Wheat is a luxury in underfed civilizations, but not in a prosperous society. Cigarettes ordinarily would not serve as money, but they did in post-World War II Europe where they were considered a luxury. The term "luxury good" implies scarcity and high unit value. Having a high unit value, such a good is easily portable; for instance, an ounce of gold is worth a half-ton of pig iron.

In the early stages of a developing money economy, several media of exchange might be used, since a wide variety of commodities would fulfill the foregoing conditions. However, one of the commodities will gradually displace all others, by being more widely acceptable. Preferences on what to hold as a store of value, will shift to the most widely acceptable commodity, which, in turn, will make it still more acceptable. The shift is progressive until that commodity becomes the sole medium of exchange. The use of a single medium is highly advantageous for the same reasons that a money economy is superior to a barter economy: it makes exchanges possible on an incalculably wider scale.

Whether the single medium is gold, silver, seashells, cattle, or tobacco is optional, depending on the context and development of a given economy. In fact, all have been employed, at various times, as media of exchange. Even in the present century, two major commodities, gold and silver, have been used as international media of exchange, with gold becoming the predominant one. Gold, having both artistic and functional uses and being relatively scarce, has significant advantages over all other media of exchange. Since the beginning of World War I, it has been virtually the sole international standard of exchange. If all goods and services were to be paid for in gold, large payments would be difficult to execute and this would tend to limit the extent of a society's divisions of labor and specialization. Thus a logical extension of the creation of a medium of exchange is the development of a banking system and credit instruments (bank notes and deposits) which act as a substitute for, but are convertible into, gold.

A free banking system based on gold is able to extend credit and thus to create bank notes (currency) and deposits, according to the production requirements of the economy. Individual owners of gold are induced, by payments of interest, to deposit their gold in a bank (against which they can draw checks). But since it is rarely the case that all depositors want to withdraw all their gold at the same time, the banker need keep only a fraction of his total deposits in gold as reserves. This enables the banker to loan out more than the amount of his gold deposits (which means that he holds claims to gold rather than gold as security of his deposits). But the amount of loans which he can afford to make is not arbitrary: he has to gauge it in relation to his reserves and to the status of his investments.

When banks loan money to finance productive and profitable endeavors, the loans are paid off rapidly and bank credit continues to be generally available. But when the business ventures financed by bank credit are less profitable and slow to pay off, bankers soon find that their loans outstanding are excessive relative to their gold reserves, and they begin to curtail new lending, usually by charging higher interest rates. This tends to restrict the financing of new ventures and requires the existing borrowers to improve their profitability before they can obtain credit for further expansion. Thus, under the gold standard, a free banking system stands as the protector of an economy's stability and balanced growth.

When gold is accepted as the medium of exchange by most or all nations, an unhampered free international gold standard serves to foster a world-wide division of labor and the broadest international trade. Even though the units of exchange (the dollar, the pound, the franc, etc.) differ from country to country, when all are defined in terms of gold the economies of the different countries act as one -- so long as there are no restraints on trade or on the movement of capital. Credit, interest rates, and prices tend to follow similar patterns in all countries. For example, if banks in one country extend credit too liberally, interest rates in that country will tend to fall, inducing depositors to shift their gold to higher-interest paying banks in other countries. This will immediately cause a shortage of bank reserves in the "easy money" country, inducing tighter credit standards and a return to competitively higher interest rates again.

A fully free banking system and fully consistent gold standard have not as yet been achieved. But prior to World War I, the banking system in the United States (and in most of the world) was based on gold and even though governments intervened occasionally, banking was more free than controlled. Periodically, as a result of overly rapid credit expansion, banks became loaned up to the limit of their gold reserves, interest rates rose sharply, new credit was cut off, and the economy went into a sharp, but short-lived recession. (Compared with the depressions of 1920 and 1932, the pre-World War I business declines were mild indeed.) It was limited gold reserves that stopped the unbalanced expansions of business activity, before they could develop into the post-World Was I type of disaster. The readjustment periods were short and the economies quickly reestablished a sound basis to resume expansion.

But the process of cure was misdiagnosed as the disease: if shortage of bank reserves was causing a business decline-argued economic interventionists -- why not find a way of supplying increased reserves to the banks so they never need be short! If banks can continue to loan money indefinitely -- it was claimed -- there need never be any slumps in business. And so the Federal Reserve System was organized in 1913. It consisted of twelve regional Federal Reserve banks nominally owned by private bankers, but in fact government sponsored, controlled, and supported. Credit extended by these banks is in practice (though not legally) backed by the taxing power of the federal government. Technically, we remained on the gold standard; individuals were still free to own gold, and gold continued to be used as bank reserves. But now, in addition to gold, credit extended by the Federal Reserve banks ("paper reserves") could serve as legal tender to pay depositors.

When business in the United States underwent a mild contraction in 1927, the Federal Reserve created more paper reserves in the hope of forestalling any possible bank reserve shortage. More disastrous, however, was the Federal Reserve's attempt to assist Great Britain who had been losing gold to us because the Bank of England refused to allow interest rates to rise when market forces dictated (it was politically unpalatable). The reasoning of the authorities involved was as follows: if the Federal Reserve pumped excessive paper reserves into American banks, interest rates in the United States would fall to a level comparable with those in Great Britain; this would act to stop Britain's gold loss and avoid the political embarrassment of having to raise interest rates.

The "Fed" succeeded; it stopped the gold loss, but it nearly destroyed the economies of the world in the process. The excess credit which the Fed pumped into the economy spilled over into the stock market -- triggering a fantastic speculative boom. Belatedly, Federal Reserve officials attempted to sop up the excess reserves and finally succeeded in braking the boom. But it was too late: by 1929 the speculative imbalances had become so overwhelming that the attempt precipitated a sharp retrenching and a consequent demoralizing of business confidence. As a result, the American economy collapsed. Great Britain fared even worse, and rather than absorb the full consequences of her previous folly, she abandoned the gold standard completely in 1931, tearing asunder what remained of the fabric of confidence and inducing a world-wide series of bank failures. The world economies plunged into the Great Depression of the 1930's.

With a logic reminiscent of a generation earlier, statists argued that the gold standard was largely to blame for the credit debacle which led to the Great Depression. If the gold standard had not existed, they argued, Britain's abandonment of gold payments in 1931 would not have caused the failure of banks all over the world. (The irony was that since 1913, we had been, not on a gold standard, but on what may be termed "a mixed gold standard"; yet it is gold that took the blame.) But the opposition to the gold standard in any form -- from a growing number of welfare-state advocates -- was prompted by a much subtler insight: the realization that the gold standard is incompatible with chronic deficit spending (the hallmark of the welfare state). Stripped of its academic jargon, the welfare state is nothing more than a mechanism by which governments confiscate the wealth of the productive members of a society to support a wide variety of welfare schemes. A substantial part of the confiscation is effected by taxation. But the welfare statists were quick to recognize that if they wished to retain political power, the amount of taxation had to be limited and they had to resort to programs of massive deficit spending, i.e., they had to borrow money, by issuing government bonds, to finance welfare expenditures on a large scale.

Under a gold standard, the amount of credit that an economy can support is determined by the economy's tangible assets, since every credit instrument is ultimately a claim on some tangible asset. But government bonds are not backed by tangible wealth, only by the government's promise to pay out of future tax revenues, and cannot easily be absorbed by the financial markets. A large volume of new government bonds can be sold to the public only at progressively higher interest rates. Thus, government deficit spending under a gold standard is severely limited. The abandonment of the gold standard made it possible for the welfare statists to use the banking system as a means to an unlimited expansion of credit. They have created paper reserves in the form of government bonds which -- through a complex series of steps -- the banks accept in place of tangible assets and treat as if they were an actual deposit, i.e., as the equivalent of what was formerly a deposit of gold. The holder of a government bond or of a bank deposit created by paper reserves believes that he has a valid claim on a real asset. But the fact is that there are now more claims outstanding than real assets. The law of supply and demand is not to be conned. As the supply of money (of claims) increases relative to the supply of tangible assets in the economy, prices must eventually rise. Thus the earnings saved by the productive members of the society lose value in terms of goods. When the economy's books are finally balanced, one finds that this loss in value represents the goods purchased by the government for welfare or other purposes with the money proceeds of the government bonds financed by bank credit expansion.

In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. If there were, the government would have to make its holding illegal, as was done in the case of gold. If everyone decided, for example, to convert all his bank deposits to silver or copper or any other good, and thereafter declined to accept checks as payment for goods, bank deposits would lose their purchasing power and government-created bank credit would be worthless as a claim on goods. The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves.

This is the shabby secret of the welfare statists' tirades against gold. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists' antagonism toward the gold standard.

[User 166933]

I just refinanced a 15 year fixed to 4.25%. To say the rates aren't getting passed on is just incorrect. Maybe what you meant to say is that the banks are learning from their mistakes and aren't giving loans to anyone who asks for one.

[gerold]

Thank you marxbites, for an eye-opening prespective. I never realized that Britains's loss of gold was the reason the Fed's increased paper lowered interest rates and triggered the speculative and, ultimately unmanageable, stock boom that crashed in '29 and dragged the banking system and the economy down with it.