Why
More Investors Like Gold By Frank Holmes -
CEO and chief investment officer - May 17, 2010
Gold is
charging up to new highs, so it’s no surprise that the
level of interest in this financial asset is charging up as
well. Last week I did interviews with CNN, CNBC, USA Today
and Reuters, and in most cases a specific question came up
– “Should people be buying or selling gold right
now?”
That’s a tough one. The monetary turmoil in Western
Europe and some early signs of inflation create the right
conditions for gold to continue its run, and while we see
higher prices in the long term, it’s difficult to predict
what might happen in the here and now.
Sovereign debt is a key driver of the current economic jitters.
The chart below shows next year’s sovereign debt estimates
for the G-7 and other key global economies – the U.S.
debt in 2011 would be about equal to GDP ($15 trillion), while
the debt loads carried by Japan, Italy and Greece would exceed
GDP.
With
all that’s been said and written about gold lately,
it’s rare to find new insights and perspectives. But
this week, Martin Murenbeeld, the head economist at Dundee
Wealth Economics, offered something new about the nature of
the gold investment market in an interview with Mineweb.
“Investment demand for gold - and investment demand
for commodities generally - is in early days. This is only
just starting to develop… One of the things that I see
when travel around NorthI America is that more and more people
are starting to question “What is currency debasement?
How does it work?” - that sort of thing.
“Now what's interesting about that is that Americans
and Canadians by and large never thought about currency debasement.
This was something that maybe an old German would think about
or Asians and Latin Americans. But not North Americans - but
that has changed…
“There is a concern among investors that not all is
right with the financial world and they don't fully understand
it. They think central bankers might be debasing their currencies
and so there is an interest developing in gold.”
If he’s correct – the masses in the developed
world are just now waking up to how their personal wealth
can be affected by the future inflation spawned by the trillions
of dollars and euros created to finance economic rescue plans
– the potential implications for gold are profound.
Here’s one way to look at currency destruction -- 10
years ago this week, $1,000 bought nearly four ounces of gold,
and today $1,000 won’t even get you a single ounce.
Gold is money, so when you look at the gold-dollar exchange
rate, the dollar’s value has fallen by a startling 78
percent just in the past decade.
Murenbeeld goes on to make another interesting point –
investment demand, rather than jewelry demand, has been the
key driver for gold for most of modern history. We are returning
to that scenario as gold’s safe haven appeal grows during
this period of unstable government and monetary policies.
Central banks in China, India and elsewhere have snapped
up hundreds of tons of gold to add to their reserves in recent
years, and a growing number of other investors are following
suit – the Shanghai Gold Exchange, for example reports
that its volume was up 36 percent in the latest quarter. Overall
investment demand is double what it was in the 1970s.
Our experience shows that whenever you have deficit spending,
rapid money supply growth and negative real interest rates
(inflation rate higher than nominal interest rate), gold will
perform exceptionally well in that currency. Right now, we’re
seeing massive deficits, negative real interest rates in the
U.S., and a worldwide debt problem that is projected to get
bigger.
We have long recommended, based on regressional analyses,
that prudent investors consider an allocation to gold –
not to get rich, but as a way diversify assets and protect
wealth. Our suggestion is a maximum 10 percent allocation
– half to bullion and the other half to gold equities
or a good gold fund that invests in unhedged gold stocks.