Got Physical Gold?

As you can figure out, especially if you’re a longtime reader, you had better have your stash of physical gold and silver.

Furthermore, if you haven’t noticed lately gold is on sale. The shiny stuff trades at a 17% discount to last year’s highs.

Today, with gold prices heading higher — $2,000, 3,000 or even $5,000 — holding the physical metal is more important than ever. That’s why I want to make sure you know the ins and outs of the physical gold market. Consider this your entry level “101” college course on gold.

Before we get to the specifics of holding physical gold, let’s take a look at the reasoning behind this trend with a brief overview of gold’s legacy…

A Brief History of Physical Gold…

Asset classes go up and down. Precious metals are, of course, another asset class. They move with the economic tides. In the past 30 years, gold has rocketed up and plummeted down.

At several points in the past 30 years, things were so bad that gold sellers were like the proverbial Maytag repairman. They led lives of quiet desperation about which no one cared. Because like the late Rodney Dangerfield, gold got no respect.

Heck, between 1999-2002, the British government sold a large amount of its national gold, nearly 395 tonnes (metric tons), for about $275 per ounce. The Bank of England used the proceeds to purchase (ahem) “high-yielding” assets, like bonds. I suppose it seemed like a good idea to somebody. But really. In hindsight, how dumb was that? The British used to fight wars for gold (remember the Boer War, anyone?) Now they’re selling gold to buy bonds? They used to hang people for lesser crimes.

Then precious metals staged a stealth rally (stealthy to the mainstream media at least.) It was not front-page news, until gold touched the $1,000 mark in March 2008. After which the price retreated 25% during that year’s market meltdown — even at this price gold was still almost three times what the Brits took in less than a decade ago.

All said, as I’m sure you know, we’ve had a 10-year bull market in gold. Take a look a gold’s massive move:

Nice chart, eh? It’s hard to argue with a chart like this. Sure, there are movements up and down. There’s the occasional pullback, such as a few tough months in 2008-09 and our current correction since 2011’s high-water mark. But the long-term trend has been up.

Just on this chart alone, there’s a case to be made for holding physical gold. In fact all you needed to do was hold the honest to goodness metal in your hands for a decade and you could have multiplied your money nearly seven times over! That’s the power of holding physical metal.

“Risky” Gold?

Still, people give me grief all the time about recommending and holding gold. “Oh, gold is risky,” they say.

“Yes, of course,” I reply. “Gold has been risky since I started buying it at $300 per ounce, back in 2001.”

Indeed, gold is risky today. From its current level gold could decline. That would be if there’s a massive market crash, and people have to sell gold to raise cash to pay off their margin calls.

Remember 2008? Gold sold down from about $1,000 to about $750. Still, that 25% haircut was mild, compared with what happened to the rest of the market. And through it all — the crash and turmoil — gold remained liquid. Somebody bought that gold. So gold is good, especially when people need fast cash.

Then again, looking ahead, gold has a huge upside. The gold price could accelerate and levitate up to $2,500 per ounce. Or maybe even $5,000. I’ll explain why in a moment.

In the here and now, all we really know is that gold has had a nice, strong long-term rise. It’s another way of saying that the dollar has had a sad, long-term decline in value.

So back to that “risk” idea. If you want real risk, just keep your wealth in pure, green-ink, paper cash. Trust the politicians and central bankers, right? No, of course not.

That decline in value of government-issued currency isn’t just a U.S. thing, either. It’s global. We’re dealing with world-spanning monetary mismanagement and stealthy inflation.

How bad is it? Last year, one senior Chinese official was caught on tape saying that “every province in China is a potential Greece,” due to overspending, bad loans and fiscal mismanagement. And that’s in China, where they shoot people for engaging in economic mismanagement.

As long as the world’s politicians spend more than their respective countries can afford, this gold-investing stuff is kind of easy — buy gold, hold gold, wait.

Supply and Demand

Through it all, the gold price is rising due to the fundamentals of supply and demand. More and more people across the world are buying.

I still recall one scene in a gold souk that I visited in Istanbul a little while ago. Men with fat wads of cash — dollars, euros, Turkish lira, etc. — were just peeling off bills and buying gold, literally with both hands. It was kind of surreal, if not medieval.

Indeed, if you’re not buying gold — or if you haven’t already bought gold (and silver) and accumulated your stash — then now’s the time to start. I don’t know how else to say it, either. If you’ve been following anything I write (in the past or today), then you have to know that owning gold has been a hammer point — especially over my five years at the helm of Outstanding Investments.

All this gold buying and demand growth is happening while global mine output — aka “supply” — is shrinking. Indeed, overall mine output may face a precipitous decline in the not-too-distant future. In other words, don’t argue with this chart, either:

It’s a busy chart, to be sure — gold mine output by region, from 1850 to 2010. Basically, the take-away point for this discussion is how precipitously South African mine output (noted in dark green at the bottom of the chart) has fallen over the past 20 years.

The famous old “big” mines of South Africa are just too deep (3 and 4 kilometers deep!) and too hard to keep running at the levels of their former glory. Not to be ghoulish, but even one major accident could cause numerous mines to shut down, and then South African gold output would fall off a cliff. If that happens, watch out. The sky is the limit for the price per ounce.

Gold Still Glittering, but Manipulated

Gold is, and always has been, the bellwether of precious metals. Sure, there are price fluctuations up and down. Most of the time, silver and platinum follow along with what’s happening in the gold pits. Not always, but most of the time. Watch gold.

Along these lines, it seems that gold is heavily manipulated by central banks. Basically, modern central bankers view gold as competition for their crummy fiat currencies. Gold takes all the fun out of both central banking and politics. That’s why central bankers and most politicians hate gold.

The good news about that central-bank bias is that gold price manipulation tends to be pretty transparent. When gold prices fall for no good reason, my spider-sense tells me that some central banker is trying to cook the books for one reason or another. Sharp price drops for gold, usually, lead to support levels and plateaus, and buying opportunities.

You can consider today one of those times.

So with all that in mind, now’s the time to take a hard look at gold. But before you run off to your local gold dealer, bear with me…there’s more to cover.

For the full wrap-up on this important physical metal discussion, I’ll stop back in tomorrow.

That’s all for now. Stay tuned.


Byron King

The Daily Reckoning