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Evidence suggests the
bull market in gold is far from finished."
John
Hathaway, Tocqueville Asset Management
Whenever the mainstream media decides to undertake one of
its periodic attacks on gold and gold ownership, it almost always begins by
laying out gold's long history as a proven inflation hedge. It then proceeds
to explain that inflation is not a problem at the present, and, as a result,
no one with any common sense would bother to own it. This argument is a
set-up – a pretext meant to confuse investor thinking and redirect interest
away from the one investment vehicle likely to do them some good in these
uncertain times.
In mid-2007, the year the financial crisis began, gold was
trading at $650 per ounce. As financial markets courted collapse in the
following two years, gold rose steadily. By the time, the global economy came
up for air in late 2010, gold was trading at $1400 per ounce and well on its
way to an interim top of $1900 in September, 2011.
The one glaring truth is that gold's rise in value
occurred during a distinctly disinflationary
period, when not even the whiff of inflation was present. Investors purchased
gold not as a defense against inflation, but as a defense against systemic
risks – including a general bank collapse and financial panic. Gold, as a
result, had proven itself to be more than simply an inflation hedge – but a
hedge against disinflation as well. By extension, since the dangers and
effects of deflation are similar to those of disinflation only more
exaggerated, gold elevated its reputation as a deflation hedge as well. That
piece of history, though irrefutable, is conveniently ignored in these
orchestrated press attacks on gold and gold ownership.
The chart above illustrates the rapid increase in demand
following the 2007-2008 financial crisis. Note that there are two distinct
divisions to the chart – one before launch of the crisis and the other after.
Before the crisis, gold investment volume was running at 300-400 tonnes per
year. Gold investment demand doubled from that base in 2008 and 2009
to 800 tonnes. It tripled in 2010 to 1200 tonnes, nearly quadrupled
in 20ll to just under 1600 tonnes, and reached nearly 1800 tonnes in 2013
(six years after the start of the crisis and with inflation nowhere in
sight). In 2014, a year of sideways price action, gold investment demand
still remained over 1000 tonnes demonstrating that the crisis psychology
driving gold demand had not abated, but simply went to low boil. Average
investment demand for the seven period was nearly 1250 tonnes per year, or
44% of the average annual mine production – a hefty component in the supply
and demand tables.
One of the principal features of the chart is the
consistency of the demand in periods of both rising and falling prices. That
consistency comes as a deliberate response to the economic times in which we
live. It used to be that gold demand would moderate during price declines.
Now gold investors view those declines as buying opportunities indicating a
fuller understanding of gold's role as a safe haven, portfolio hedge and
alternative savings vehicle. Another factor driving this chart is the sheer
number of new participants in the gold market globally – a group whose
thinking is identical to the one that preceded it. Investment gold demand, in
conclusion, has become a juggernaut, and one likely to remain in place as
long as widespread financial system risks remain a part of the investment
equation.
Mining
costs pose existential threat to world's gold mines
Moving over to the
supply side of the fundamentals' table, Gold Survey 2015, GFMS Thomson
reports that the all-in cost of gold mine production, a figure that
encompasses the total operating overhead, comes in at $1208 per ounce
industry-wide. When impairments (write-downs in the value of mining company
assets) are taken into consideration, the all-in cost of production jumps to
$1314 per ounce. In other words, at current prices the
gold mining industry is operating deeply in the red. If market prices do not
improve, and soon, the threat of reduced production and possibly even
closures looms on the horizon. Though few have taken note, GFMS sums up the
situation by saying, "[I]n terms of both volumes and profitability, the
mining industry remains in a precarious position." GFMS reports 64% of
the world's gold mines had all-in costs less than $1266 per ounce in 2014,
the average price for the year. One wonders what percentage of mines are
underwater at the current $1100 per ounce price, or worse the level of damage
that would be done if Goldman Sach's recent forecast of $950 per ounce
actually came to fruition. Dim prospects for the mines translate to brighter
expectations for long-term holders of physical gold coins and bullion
investors who could become the primary beneficiaries of a mining industry
existential crisis.
* * * I would like to
thank GFMS Thomson Reuters for its kind permission to use their statistics in
this issue of our newsletter.
Confused
about gold and the DJIA? Don't be.
Thoughtful
question from would-be gold owner/my answer
Michael,
I have been reviewing your web site and am impressed.
I currently have about $750,000 in cash, money market
funds, equities and bonds. I am 74 and my wife is 72. We are both retired.The
only fixed income we receive is $21,000 per year from social security, and
$7,000 per year in bookkeeping fees earned by my wife. Our living expenses
are about $75,000 per year leaving us a shortfall of about $36,000 per year.
Our total net worth is about $2,200,000 (home is $1,500,000 of that).
When I read your article Choosing a Gold Firm about 3
weeks ago, I felt motivated to jump in to the gold market. However, it seems
that the value of an ounce of gold has dropped to about $1,100. What confuses
me is the fact that the DJIA, is right now less than it was at the first of
the year. Based on what I thought I knew, I expected to see gold soaring, but
the reverse is the case.
What should I do? Is gold at a bottom? Should I get in
now, or wait?
BN
Charleston, SC
______________________
Hello, BN.
Gold rarely goes by a predetermined schedule. Some would
say it is rather obstinate. It goes where it wants to go in its own time and
there are all sorts of forces at play with respect to its pricing – a
situation of which I am sure you are fully aware. I have never believed that
people should own gold because they think it is going to soar in price in the
short term. Gold is first and foremost portfolio insurance and a longer-term
alternative savings plan where asset preservation is a key objective.
Secondarily, it is an investment for capital gain. As a result, if one goes
into gold ownership with the attitude that it is simply a workable
alternative to stocks or bonds, then short term price fluctuations should not
serve as discouragement to either current or would be owners.
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Can
you guess the gold owner?
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None of the conditions that caused gold to rise from the
$300 level to the $1800 level pre- and post-crisis have changed, and
ultimately they could reassert themselves down the road perhaps in ways most
of the analysts never dreamed. The reasons for owning gold are as strong
today as they've ever been and perhaps even stronger given the socialized,
artificial values at work in other markets.
It is unfortunate that you have come to this place in your
life (at 74) only to find that your savings will not do for you what you had
hoped and I empathize with that. Investors are forced into speculation in
stocks, real estate and other ventures when they should be living off a fair
annual return on their bank savings. I don't think those circumstances are
likely to change any time soon. If I were to guess at this juncture, I would
say that even if we do get increases in interest rates, they will be small
and nearly inconsequential and you will be in no better position than you are
now.
From my perspective, gold is among the most undervalued of
the major portfolio assets at this juncture. I am not the only one who
believes that. Recently Interest Rate Observer's James Grant announced
"Mr. [Gold] Market is having a sale." Similarly, Tocqueville's John
Hathaway commented that "Evidence suggests the bull market in gold is
far from finished." (More on that "Evidence" in an upcoming
News & Views. Sign-up here to receive your complimentary issue by e-mail
when released.) Contrary to characterizations in the mainstream financial
media, global physical demand is soaring in the wake of the recent artificial
price drop and very strong among our firm's clientele. Web site visits to
USAGOLD have increased markedly and inquiries are at a level not seen for
years.
In short, a large segment of the public believes gold is a
buy at these prices. Much of this is due to a major change in financial
market psychology that has evolved over the past several years. Now there is
a very large group of people out there who believe in gold, and not just in
the United States. That belief cannot be suppressed no matter how hard the
mainstream press tries. An equally large contingent understands that markets
supported artificially are ultimately doomed to failure and potential
collapse once the props come down.
In the end, you will need to make a decision on three
matters:
1. "Do I believe that the current economic situation
warrants hedging?"
2. "Do I believe that gold is the hedge that will get
the job done for me?"
3. "Do I own enough gold with respect to my total
portfolio to make a difference?"
If the answers in respective order are yes – yes – no,
then you should add more gold to your portfolio and it should be in the
proper form – gold coins held in your possession.
My continuing golden wishes to you and family,
Michael
J. Kosares
____________________________
Michael J. Kosares is the founder of USAGOLD and the
author of "The ABCs of Gold Investing - How To Protect and
Build Your Wealth With Gold." He has over
forty years experience in the physical gold business. He is also the editor
of News & Views,
the firm's newsletter which is offered free of charge and specializes in
issues and opinion of importance to owners of gold coins and bullion. If you
would like to register for an e-mail alert when the next issue is published, please visit this link.
Disclaimer
- Opinions expressed on the USAGOLD.com website do not constitute an offer to
buy or sell, or the solicitation of an offer to buy or sell any precious
metals product, nor should they be viewed in any way as investment advice or
advice to buy, sell or hold. USAGOLD, Inc. recommends the purchase of
physical precious metals for asset preservation purposes, not speculation.
Utilization of these opinions for speculative purposes is neither suggested
nor advised. Commentary is strictly for educational purposes, and as such
USAGOLD does not warrant or guarantee the the accuracy, timeliness or
completeness of the information found here.
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