05/17/10 San Antonio, Texas – 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 I travel around North 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.
Regards,
Frank Holmes,
for The Daily Reckoning
P.S. You can visit my blog, Frank Talk, for more daily insight and commentary.
[Editor's Note: Frank Holmes will be a guest speaker at the Agora Financial Investment Symposium in July, along with Marc Faber, Bill Bonner, Barry Ritholtz, Doug Casey, and many others. You can find the registration details here.]
Frank Holmes
Frank Holmes is chief executive officer and chief investment officer of U.S. Global Investors Inc. The company is a registered investment adviser that manages approximately $2.08 billion in 13 no-load mutual funds and for other advisory clients. A Toronto native, he bought a controlling interest in U.S. Global Investors in 1989, after an accomplished career in Canada’s capital markets. His specialized knowledge gives him expertise in resource-based industries and money management. The Global Resources Fund was also Morningstar’s top performer among all domestic stock funds in the five-year period ending Dec. 31, 2006.
The Daily Reckoning is your premier source for making sense of the news Washington and Wall Street generate. Each business day, The Daily Reckoning calls on its stable of world-class writers and thinkers to show you how to get ahead.
Start your 100% FREE subscription to The Daily Reckoning today and you’ll get a free research report, “How to Survive the Fall of Social Security.” Simply enter your email address below to get your free report and join over 495,000 worldwide Daily Reckoning subscribers!
We Respect Your Privacy and We will
Never Share or Sell Your Email Address
only 10 percent max? come on frank, here we all hoard more than that… have you read MoGu?
“Why more investors like gold.” Could just as well said “Why some investors like gold.” The gold market is actually fueled by a very small group of investors. Now this small group hopes and prays that more investors will jump on the bank wagon as they know that there are other forms of investing that is as good as gold. I guess most investors just cannot see them selves walking around with little leather bags of gold pieces buying things that everyone else needs to sell and don’t want anyway. Or like MoGu coming out of his shelter scurrying around looking for something to buy. Just the picture of it is laughable.
Just like .99 cents is so much lower than $1.00. Pathetic
“very small group of investors.” did you read the article? china, india, etc. these are small investors? you must be an investment broker. like the current administration refuses to call terrorism exactly that you folks won’t call gold an investment but a hedge. you keep your currency i’ll take the gold.
10% isn’t bad as long as the other 90% is silver and oil.
Thanks MG!
10% minimum is more like it. And that’s your “money insurance” position.
Look, there are times when gold and PM mining shares are good speculations and times when they’re not. Right now, if you hadn’t noticed, they’re working. The trend is up…for good reason.
Just don’t be stupid. Practice some simple money manage techniques. Don’t buy on margin. Don’t assume you’re right and get wedded to any position. Don’t concentrate too heavily on one stock. Look to limit risk. Buy dips, sell rips. Don’t chase. Take some money off when you have big gains, etc. etc. But, unless you’re risk averse or aren’t in a position to get more aggressive, there’s no reason not to be in a lot more heavily than 10%.
Mr. Holmes is just giving the standard conservative investing caveat. Pro forma. He almost has to do it. The irony is that if you want to protect yourself, the traditionally safe things ain’t gonna cut it. When the very currency your investments are denominated in becomes a clownbuck, safe means gold. It’s really that simple. Protection AND profit…that’s what you’re getting right now.