Jeff Clark

Tracking the numerous ongoing bullish factors for gold is quite a chore. There are, quite literally, so many compelling arguments for holding our favorite metal that I used to catalog them each month in our letter.

The reason there are so many “reasons” is because gold is unlike any other asset. It…

  • responds to its own supply and demand
  • protects against short-sighted government actions and interventions
  • is a bellwether of market sentiment and economic outlook
  • protects against currency devaluation and inflation
  • is global
  • is one of the most beautiful metals ever found in the earth’s crust
  • is a store of value
  • is timeless
  • is money

How many assets can you say have all those characteristics?

In spite of gold’s recent correction, the reasons haven’t decreased. In fact, the case for holding gold is stronger than ever. And over the past two weeks, a few “reasons” have surfaced that have fallen mostly under the radar. These, I believe, portend a higher gold price. In fact, it is catalysts like these that could end up in our children’s history books that, in retrospect, were obvious to see…

1. For the first time ever, China has invested in GLD, the gold exchange-traded fund. Their sovereign wealth fund, China Investment Corporation, recently invested $155 million in the ETF. The amount represents only 0.05% of the sovereign funds’ $300 billion, meaning there’s a lot more where that came from.

Those mainstream lemmings who predicted China was done buying gold now have to deal with the reality that this move more likely signals they are closer to the beginning — and not the end — of a long-term strategy to diversify into gold.

2. The Prime Minister’s Office in India is creating a stream-lined process so that the country’s state-owned corporations can “aggressively pursue the acquisition of strategic mineral resources.” The Indian government, normally known for thick-layered bureaucracy, has created a centralized body that will have “rapid strategic and decision making powers.” This is telling, both from the perspective that they see some urgency to the matter, and that the acquisition targets are minerals.

Given the country’s historic propensity to own gold, it’s not a stretch to think the yellow metal will be high on the list of “strategic investments.” Recall their government purchased almost half the IMF gold for sale last year in one fell swoop.

The upshot? Don’t be surprised to soon hear of India following China’s lead of buying precious metal companies and resources.

3. “Iran is now a nuclear state,” declared President Ahmadinejad last week. The Islamic republic has produced its first batch of high-level enriched uranium, which they claim is solely for electricity purposes but can also be used to create material for atomic weapons if enriched to 90%. In response, the U.S. imposed new sanctions, and the U.N. is considering adding more of its own sanctions, too.

The West recently proposed that Iran export its uranium for enrichment and then have it returned as fuel rods for a reactor. Iran demanded changes to that plan, which were rejected, so claimed they had “no choice” but to start enriching to higher levels on their own. “God willing,” declared Ahmadinejad, “daily production will be tripled.”

I’m sure this will all just blow over, right?

4. The U.S. government must inflate. Here’s another reason we think that sooner or later inflation trumps deflation… by 2020, government economists project that entitlement benefits (Social Security, Medicare, etc.), along with interest payments on the national debt, will devour 80% of all federal revenues.

This assumes entitlement benefits don’t grow, which, of course, they are. The overall national debt, meanwhile, will rise to 100% of GDP within a few years, an alarming level by any measure. Even Moody’s warned that our credit status could lose its triple-A rating if the nation’s finances don’t improve, an unheard-of prospect just a few years ago.

So, we’re abruptly fleeing our debt-adding habits, right? As you probably heard last month, Obama signed legislation that raised the cap on government debt from $12.4 trillion — already close to being breached — to $14.3 trillion to permit more borrowing. As Doug Casey has pointed out numerous times, this is the exact opposite of what the government should be doing and will have serious inflationary ramifications.

There’s only one way out: devalue the dollar to reduce the debt burden. And the direct result of that is a rising gold price. We may very well see another round of deflation, but the endgame is inflation.

What I would point out is that any one of these reasons would be sufficient for wanting to put some gold in your portfolio. It’s the cumulative effect that’s potentially scary, one that argues we should be overweight precious metals at this point in history. The reasons are numerous and, in my opinion, overwhelming.

Regards,
Jeff Clark
Senior Editor, Casey’s Gold & Resource Report

February 23, 2010

Jeff Clark
  • Karl Vinsek

    Dear Jeff,
    I remain unconvinced that gold has any value as an investment. Speculation, I agree it’s number one, but then number 2 is lottery tickets. Your reasons for buying gold are great, but you forget to mention, the supply of gold is virtually unlimited, it is just well controlled. Sooner or later, if the price remains above $800.00 per ounce, Producers will change their production plans and the market will be flooded with product. and this is a product, that unlike most other commodities, is NOT consumed. Sorry, but it will be a cold day in Hell before I invest any real money in gold. But Keep talking, cause I’m going to buy puts when the price runs up over about $1500.00/oz

  • http://www.privatetrustinvestments.com LeRoy Young

    Why dont more Americans buy GOLD. GOLD is much easier to buy, sell and track than most commodities.

  • dickson dangers

    please write on silver. Ted Butler , Jason Hommel ( Silver Stock Report), Investment Rareties( misc. analysts) all point out that (1) 99 plus % of ALL silver ever mined is gone, (2) the B.I.S.-Bank of Intl. Settlements shows over $200 billion silver has been pre-sold (18 yrs. of production) and so on… silver prices will explode!

  • BDTR

    Karl,

    As you define speculation, regarding I presume any medium of exchange, do not paper Dollars, Euros, Yen, etc. much more closely resemble actual ‘lottery tickets’? As to the supply of printed paper promises issued by totally trustworthy governments that care deeply about retaining citizen wealth, there isn’t a ‘virtually unlimited’ production. It’s absolutely unlimited. Whereas annual global gold production has averaged between 1 – 2% of total gold supply historically, there’s a strictly limited and declining resource availability of new ore deposits as cited by the U.S Geological Survey utilising state of the art technology. So, producer plans are strictly limited to what’s economically accessible within demonstrably limited, available resources.

    Of course, the other side of the supply issue is demand. As the glut of depreciating reserve fiat is applied towards diversifying into a much more limited supply of gold, as has been occurring for a decade, a growing global population is just beginning to recognise what real money is. Physical off-take as a result has increased dramatically under what’s a very small percentage of total population, and central banks have become net purchasers. Consumption for exchange demand is really just getting started against a backdrop of the required governmental monetization of unfunded liabilities and stimulus policy.

    I suggest that you examine and monitor the relationship between the history of all fiat regimes, and the one now inflicting increasingly erosion of all fiat on par and asset values so denominated. We’re the first economic generation in the history of humanity to disregard gold, and silver as money. It didn’t come by nature, but rather banker opportune theoretics, incessant political proxy persuasion, then official coercion and finally overt manipulation of markets and accounting and rationalisation. It’s becoming frantic and fantastic.

    Real money, Karl, does not require official sanction. So, I counsel caution on your intended put strategy, and wish you well.

  • http://whiskeyandgunpowder.com Royce

    If South Carolina becomes the first state to re-monetize gold, as required by the U.S. Constitution, I will sell 1/2 of the gold I own ($80,000 purchased at $464) and spend it in South Carolina. I currently live in Florida and the politicians here do not have the courage to consider this yet. I ask others to commit to rewarding South Carolina if they take this bold step now being proposed in congress. God bless the USA and God bless the people of the great state of South Carolina. Long live the U.S. Constitution. c[]xxxxx[]:::::::::::::::::::::::::::>

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  • ric

    dickson, i agree; silver will shine. i too, hope to see an artical on this. long, silver wheat water ect..

  • clintwood

    Gold is great. Gold is prestigious. But statistically there is more gold above ground than silver. What does that translate to the lament? BUY SILVER ALREADY!!! Gold will perform, no doubt. But to what extent, i’ll leave that to the “pro’s” to elaborate on. As for myself….. Silver is the ticket! Buy LOTS of physical Silver! As much as your little lockbox/safe/depositbox will hold! Silvers day will come, and those that keep accumulating this PM will reap the rewards, whether monetarily or otherwise. So dont get me wrong, gold is a great hedge, but silver will make a dramatic comeback. We’re looking at 60:1 ratio now…. I see 20:1 or better in the next 5 years. Do your homework people. Skool yourselves. Fortuneatly we have sites like these to spit the real on whats really going on. Again, edumacate yourselves.

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